There are many reasons why people decide to sell their home. They may need to move to another area for a new job or to be closer to family and friends.
Some people have outgrown their current residence, while others need to downsize after their children have moved out. Other times, they just need to free up some cash to pay for medical bills or other unexpected expenses.
Some home sellers choose to sell their home to a family member. This could be an opportunity for a younger relative to become a first-time home buyer.
This may also be done in the event of injury or loss to a loved one. It can also happen when a relative just needs a chance at a fresh start.
Whatever the reason is, selling a home in California to a family member can sometimes be complicated, but it definitely can be done.
Here are a few things to keep in mind:
1. Stay on the IRS’ good side.
Most of us never want to interact with members of the IRS. However, when property transactions are conducted between family members, the IRS usually pays close attention.
That’s because there have been many documented incidents of questionable activity. Purposely selling a home at a loss or claiming false deductions are just some of the activities that have been penalized.
To stay in the IRS’ good graces, make sure that everything involved in the home sale is on the up and up. Don’t try to sell the property for less than what you owe to your lender.
If you are going to take a loss on the sale, don’t claim a tax deduction on that loss. Have a realistic selling price and ensure that any other interested parties can make an offer on your home.
Ultimately you’ll want to consult a tax professional to make sure your specific situation is covered.
Related: Selling a Home in San Mateo, CA
2. Have a set price in mind
When dealing with family members, logic is sometimes forgotten. People think and act with their hearts instead of their heads. Selling a home to a family member is no different.
When it’s time to think about selling, be consistent. Have a set asking price. It’s okay to be flexible, but don’t overdo it. Get everything in writing, and don’t skip anything important.
Make sure that both a home appraisal and a home inspection are conducted. This helps both parties know what to expect. It also helps you as a seller determine whether or not your asking price is reasonable.
3. Stay close to your home’s fair market value.
While it may be tempting to offer your relative a great deal, this can be more trouble than it’s worth.
It may raise red flags with the IRS, not to mention your neighbors or other prospective buyers.
To keep things simple, set a price that’s at or near the home’s fair market value. Getting a home appraisal will tell you what your home is actually worth in today’s economy.
Your price can fluctuate a little higher or lower, as long as that variance is within reason. It’s also beneficial to you to get the best value from your property when it’s time to sell.
Related: The Laws and Taxes When Selling a House in California
4. Enlist the aid of a lawyer.
While most home sellers work with a real estate agent, if you’re selling your home to a family member, you may choose to hire a lawyer to assist with the process.
A lawyer can cut through the red tape and help you understand what you legally can and cannot do.
The lawyer you hire should have experience with real estate matters. They should also have a network of professionals that can help every step of the way.
The attorney should be available at your convenience and assist you with the necessary paperwork that’s involved.
5. Don’t forget about the gift tax!
More to keep in mind regarding the taxes associated with selling a house. Some people may want to offer their home to a family member at a reduced rate.
This can be seen as a gift in the eyes of the law. It can also be subject to federal tax. You are legally allowed to gift up to $14,000 per year to any family member you wish without having to pay taxes on that gift.
Related: What You Must Disclose When Selling a House
6. Consider having an owner-financed sale.
An owner financed sale is a home sale where the buyer’s monthly mortgage payments go directly to the home seller instead of a lender.
This can save the buyer a lot of money in terms of interest and other fees.
Just make sure that there is a clause in the contract stating that if the buyer defaults on their payments, that the home then reverts to the original owner.
Related: 10 Best Ways to Increase Home Value in CA
In Closing
These are just some of the things to consider if you’re planning on selling your home to a family member. If you do agree on a sale, make sure that you have everything in writing.
Verbal or handshake agreements are too risky for real estate transactions. If something goes wrong, you as the seller could be held responsible, even for things that aren’t necessarily your fault.
Be sure to ask advice from professionals in the industry if you’re going down this route. Talk to people who have had experience in home sales to family members.
You can learn from their stories and gain a better understanding of what to expect. Above all, don’t let your emotions get in the way. No matter how close or how distant you may be, selling a home to a family member can get complicated.
There may be unexpected problems or issues that arise. Be prepared for every eventuality, and have a professional on your side. It’s the only way to help make sure that everything goes as smoothly as possible
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