The real estate market has been red-hot in a lot of areas of the country, and that’s made finding a house difficult for a lot of would-be homeowners.
When you announce that you’re planning to sell your home, you may end up getting a quick offer to purchase the property — as-is — from one of your relatives.
Sounds great, right? Hold on: You need to handle this carefully. If you don’t, you could attract a lot of unwanted attention from the Internal Revenue Service (IRS) and ruin some of your family relationships.
Why would selling your house to a relative be a problem?
Essentially, the problem you could have with the IRS is the same problem you may have with some of your family members. They may both believe that you’re giving your relative a “sweet” deal that doesn’t reflect the home’s real value.
For the IRS, selling your home to a relative for less than it’s actually worth is the same as giving them a very valuable — and taxable — gift. (The same is not true of “arm’s length transactions” between unassociated third parties.)
Some of your relatives may also believe that you’re undercutting the price of your home. You may not particularly care what your cousin thinks if you’re selling the family home to your oldest son, but you may have good cause to be concerned if your younger son believes that you’re showing undue financial favoritism to their brother. That sort of thing can tear a family apart.
How do you avoid problems when you’re selling a home to a relative?
The smart move is to involve third-party experts. You don’t have to hire a realtor (and pay their fee), but you do need to have the home inspected for problems and appraised by an independent source to make sure that you know its fair market value.
Navigating the sales process on a home can be very complicated. It’s not actually any easier when you have relatives involved. Make sure that you fully understand the legal ramifications of the deal you’re making before you make any verbal or written agreements.