Can I Sell My House to a Family Member?

If you’ve thought “I should sell my house to a family member” be sure to know what’s involved. Family sales can be more complicated than you’d think.

If you’ve ever thought “Maybe I should sell my house to a family member,” you’ve likely also wondered whether or not it’s a good idea. The sale of a home to a family member is possible, legal, and can be very easy for everyone involved.

There are, however, no guarantees that everything will go smoothly. If not handled properly, the deal could result in unwanted financial and tax implications, not to mention the possibility of hurt feelings and family drama.

Family sales work best when both parties are aware of the potential pitfalls, and enlist the help of a professional real estate agent to facilitate the transaction.

There are Pros and Cons of Selling to Family

The sale of a home to a family member can be a win-win, especially if the seller wants to keep a beloved home in the family or their relative needs a helping hand. It also simplifies the seller’s challenge of finding a buyer, and the buyer’s quest for a suitable home. In these instances, the buyer is already familiar with the property or may have even lived there at some point.

Family sales are known as controlled or non-arm's-length transactions, as opposed to an arms-length transaction between two strangers. In many cases, the existing relationship makes the sale quick and easy. However, there may be hiccups in terms of family dynamics, tax implications, and financing problems.

By YuriArcursPeopleimages purchased from Envato Elements

Protecting Family Dynamics

Under normal circumstances, a home sale is stressful for both the seller and the buyer. When family is involved, emotions can run higher. Some scenarios to consider:

  • There may be arguments about price. There can be a vast difference between the value placed on the house by the seller and what the buyer is willing or able to offer.
  • There could be conflicting expectations. For example, parents may assume their child will not make any major modifications after the sale. Or the child may expect the furniture to stay, at no additional cost.
  • Sellers may be offended if buyers make the sale contingent on expensive repairs. Buyers may be offended if the seller refuses.
  • Unclear timelines can lead to frustration. For example, the seller may assume there is no rush to remove their personal belongings but the buyer wants them gone now. 
  • Poor communication can lead to misunderstandings and hurt feelings. 

This does not mean selling a house to a family member is a bad idea. Plenty of families manage it without a problem. But no one wants conflict to ruin a family relationship. Both sides need to recognize that family dynamics can play a part, and agree ahead of time on how they will deal with disagreements. 

Tax Implications: Why Does the IRS Care If I Sell My House to a Family Member?

The IRS pays special attention to non-arm's-length transactions. This is because selling property to family members, especially at a deeply discounted price has historically been a red flag indicating fraud or someone trying to avoid estate taxes. In 2017, estate taxes changed considerably, making this less of an issue, but the government still reviews these transactions to make sure everything is on the up and up. 

There are a few instances when the sale will change a seller’s tax return:

  • Selling a home for a price well below its fair market value can count as a gift. In 2024, individuals are allowed to gift someone $18,000 a year (couples can give $36,000). So if the difference between the sales price and value is more than that, it will need to be reported on the seller’s tax return. There is a very high lifetime threshold of gifts to meet before a taxpayer actually owes anything, but the IRS does need it reported so they can keep track.
  • Selling a house for a lot more than its purchase price can trigger capital gains tax, especially if the seller is not buying another home after the sale. The 2017 tax changes affected this too, though. There are exclusions for gains up to $250,000 ($500,000 for couples), so this only applies to the most expensive homes. Still, it can be something to consider when selling a house to a family member for less than it is worth. 

Cover Image by monkeybusiness purchased on Envato Elements

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