Selling a home to a family member can be a tricky process for both the seller and the buyer. Just because the purchaser is a relative, that does not mean you can sell the house at a discount. In addition, you must go through many of the same legal processes that you would normally perform if selling to a nonrelative. If you fail to follow the proper procedures, both the buyer and seller could wind up in trouble with the IRS.
Hire two or three independent appraisers to appraise the value of the house and provide you with a written and signed appraisal document. The price that you sell the house to your relative for should not be more than 25 per cent less than the lowest amount, or the IRS may audit you.
Arrange the financing with your relative. You can choose to arrange seller financing, through which the relative makes payments to you, or you can have your relative purchase half of the home outright and pay the remainder in payments. Your relative can also get a traditional mortgage with a bank or mortgage company, but if the relative defaults on the loan, the bank can claim the house.
Make the home available for an inspection, which many counties require to process the sale. Although the relative you are selling to will usually pay the home-inspection fee, you can choose to pay it if you wish. If your county does not require an inspection, you can skip this cost if your seller agrees.
Hire a title company to process the transfer of the house title from your name to your relative's name. If your relative decides to get a standard mortgage, the bank or mortgage company requires this step.
Hire a real estate lawyer to look over all the final sales documents to ensure that everything is in order and legal. The lawyer will also send all of the necessary paperwork to the county and to the mortgage company if necessary. Attend a closing meeting at the lawyer's office with your relative to sign all of the final paperwork.
If you decide to undertake seller financing, you must charge your relative interest, and it must be at least the minimum amount the IRS allows. See the chart in the Resources section for the 2010 federal allowable rates.
Tips and warnings
- If you decide to undertake seller financing, you must charge your relative interest, and it must be at least the minimum amount the IRS allows. See the chart in the Resources section for the 2010 federal allowable rates.