Sale to Family

Although most home sellers strive to maximize the sale price of their home, there are scenarios where making a profit isn’t the seller’s primary goal. One of the more common examples of this is selling a home to a family member, like a son, daughter or sibling. Common reasons for selling a home to a family member include:

• Accomplishing estate planning goals
• Wanting to keep the property within the family, especially if the property has been in the family for generations
• Helping the family member acquire their first home

Home Sale as an Estate Planning Tool

From an estate planning perspective, selling a home below market value can reduce the value of your estate, potentially below the estate tax exemption threshold.

Transferring the property via a below market value sale is also one potential way to avoid probate proceedings upon death. Although there are other ways to avoid probate, like a living or revocable trust, a direct transfer through a sale can ensure the property is immediately accessible to family members without extra disbursement steps.

Choosing to sell your home also makes it your choice rather than leaving it up to family members or the court to decide who gets the home after your death if there are disputes regarding the estate. If you have specific wishes pertaining to property stewardship, this could be the preferable solution. It also has the benefit of mitigating the risk of conflicts between family members since the sale will clearly be your decision.

Financial Considerations

Selling a home below market value does have real financial implications – primarily because there’s a real opportunity cost of tens of thousands or even hundreds of thousands of dollars. This might not matter to many people selling a home to a son or daughter, but it’s important to really think through the long-term ramifications of losing that money.

If you have any concerns about retirement savings or your personal financial safety net in case of job loss or a serious medical issue, you may want to look for a different way to help your family member.

You can potentially maximize the sale price of your home with 72SOLD, take the equity and buy a smaller home for yourself and use the remainder to help your son or daughter purchase a new home of their own.

This approach has the benefit of letting your family member make their own choice on the home they live in rather than having them simply inherit a home by default. 

Tax Considerations

Both you, as the seller, and your family member, as the buyer, will need to deal with the tax implications of selling or buying a home below market value. This is typically categorized as a gift for tax purposes and could result in gift tax liability.

Typically, the difference between a home’s market value and its sale price will be categorized as a gift. The IRS allows individuals to gift $18,000 per person per year (as of 2024) without incurring the gift tax.

Can a Buyer Get a Loan for a Property Bought Below Market Value?

It depends on the lender’s policies and the discount. Lenders base risk assessments in part on the loan-to-value ratio, or the market value of the house compared to the loan amount. If the house is worth more than the loan, as would be the case in a below market value sale, it’s typically a good thing for the lender.

What you won’t be able to do is get a loan for the full market value and pocket the difference between the actual sale price and the fair market value. A lender won’t lend more than the purchase price of the home, even if the purchase price is less than the fair market value.

The reduced risk could result in more favorable terms for the buyers, which could be beneficial if the buyer is a son or daughter who doesn’t have a robust credit history when buying their first home.

Should You Sell a Home to a Family Member for Below Market Value?

This is a personal decision you’ll need to make with your family member. While it can be a nice gesture or important to you for personal reasons, there are some potential downsides. For example, the family member isn’t getting to choose a home that’s located in a place they want to live or one that’s near work or other amenities.

If you want to sell your home for maximum price and then use some of the proceeds from the sale to help a son, daughter or grandchild buy their first home, the team at 72SOLD can help. We excel at maximizing the sale price of homes so you get the most out of the equity you’ve built over the years.