How To Sell Your House To A Family Member

Selling property to family members is something you may consider doing, but it carries with it a few complications. On the plus side, you don’t have to worry about looking for a buyer since your family members are right there. However, several drawbacks exist in selling houses to family members. Family property can be the source of feuds and bad blood within the clan. Prices and negotiations are a bit more nuanced when dealing with someone you’re related to. If you insist on following through with a sale of the property to your family member, here are a few things you should keep in mind.

Is It Legal?

Selling a house to a family member isn’t illegal. It allows you to quickly move the property to someone you know and trust and possibly even defer some of the transfer costs. The complications in selling a house to a family member come with discussing the terms and the exchange of funds for the property. Forbes mentions that family business, especially that which results in the exchange of money, could cause a rift if poorly handled. If you’re able to deal with your family members fairly and above-board, you can sell your house to a family member quickly enough. The caveat is that if you’re facilitating this sale to evade taxes, then it becomes illegal, and you could face prosecution for it.

Transferring the Title

Once you sell the house, you’ll need to figure out how to perform a title transfer. You can use several legal documents to deed the property to your relative, including:

o   Quitclaim Deed: According to Investopedia, a quitclaim deed allows your relative to take control of the property but doesn’t protect them against any claims on the house.

o   General Warranty Deed Transfer: This deed allows you to transfer all your rights and privileges on the property and protects your relative from any action against the asset.

o   Special Warranty Deed Transfer: If you had any claims pending on the house, this deed ensures that your relative is protected from their continued action.

It’s best to have a lawyer present when dealing with deed transfer so that both parties can be aware of what’s taking place in the presence of a professional. Each type of deed has its own nuances, and a lawyer may explain what each one does. Both parties can then agree on a deed class that fits their needs. Based on the property’s value, you or your relative might be required to pay capital gains tax or gift tax.

Gifting a House to a Family Member

If you don’t want to sell your house or prefer to just hand it over to your family member, you can do so as a gift. However, you’re only allowed to gift up to a certain amount per year without having to pay taxes. Smart Asset mentions that the maximum giftable amount per year in 2020 is $15,000, with a current maximum lifetime tax-free giftable value of $11.58 million. The only exception is gifting the house to your spouse. In this situation, you don’t pay any taxes on that gift at all. When you gift a home to someone else, you are responsible for paying all associated taxes on the present.

Typically, the $15,000 a year doesn’t count towards your property gifting exemption. If you transfer property to your child and their spouse, you can still gift them each $15,000 for that year. The remaining value of the property less the monetary gifts will then be the taxable income. You can file a return on that taxable income or simply include it as a gift that considers your lifetime gift allowance. You should note that this lifetime gift allowance counts per individual, and if you have a spouse, your entire family lifetime gift allowance would be $23.16 million.

If you gift a home to a family member who spent money on the best dental implants but hasn’t been living on the property, you may run afoul of capital gains tax. To avoid this, the family member should be living in the home for no less than two years. If they don’t meet this stipulation, the value they’re liable to be taxed on is the difference between what you paid for the house when you bought it and the price they paid when you sold it to them. The buyer, not the seller, usually pays the capital gains tax.

Saving Money in Familial Property Transfers

The best way to avoid running afoul of liabilities and taxes is to consult a lawyer or realtor before deciding on selling your home to a relative. Capital gains tax could be a hefty bite into someone’s savings if the property you’re selling them appreciated drastically from when you bought it. If you’re gifting the property, you should know how much it would take out of your lifetime gift allowance for your estate. Filing the return on the remaining value is crucial as well.

There have been situations where homeowners wanted to sell their property to a relative for a dollar. The value is symbolic, but it counts as a sale. You might think this a smart way to get around the capital gains tax, but this has been tried before, and it failed. When you offer a discount to a relative, the IRS sees this as a gift and will tax you based on the size of that discount. You may end up paying far more in taxes than you initially bargained for.

Family property is a touchy subject that many individuals don’t like to think about. It can be a source of great strife and infighting and can lead to destabilization of relationships. Yet, in some cases, it may be useful to transfer a property to a family member. If the property has liens on it or is the subject of a court matter, you may find it expeditious to simply transfer the property with the appropriate deed to protect it from litigation. Consulting a professional is the best first step before entering into any familial property dealings.