How to Buy a House From a Family Member

Buying a house from a family member may seem simpler than a transaction between strangers due to existing relationships. However, these sales involve specific financial, legal, and tax considerations that require careful attention. Properly navigating these aspects is important to maintain family harmony and ensure compliance with all legal requirements. Ignoring these details can lead to unintended tax liabilities, legal complications, or strained family relationships.

Establishing the Property’s Market Value

Determining the fair market value (FMV) of the property is a foundational step, even when selling to a family member. This valuation is important for setting a fair price and for tax purposes. If the sale occurs significantly below the property’s FMV, the Internal Revenue Service (IRS) may consider the difference a gift, which can trigger gift tax implications for the seller.

Professional appraisals are the most reliable method for establishing FMV. A licensed appraiser evaluates the property’s condition, size, location, and recent sales of comparable properties. This independent assessment provides an objective value, helps avoid family disputes, and serves as official documentation for tax authorities. Comparative Market Analyses (CMAs) from real estate agents offer a less formal estimate, useful for initial discussions, but typically do not substitute for a professional appraisal for tax or lending purposes.

If the sale price is below the appraised FMV, the difference is treated as a gift from the seller to the buyer. For 2025, individuals can gift up to $19,000 per recipient annually without triggering a gift tax reporting requirement. If the gifted amount exceeds this annual exclusion, the seller must file IRS Form 709, even if no actual gift tax is due. The excess amount reduces the seller’s lifetime gift and estate tax exemption, projected to be $13.99 million per person in 2025.

Choosing a Transaction Structure

The chosen transaction method significantly impacts financial and tax obligations for both buyer and seller. Each structure presents distinct advantages and considerations that should be carefully evaluated to ensure a smooth transfer of ownership.

Standard Sale

A standard sale operates like any other real estate transaction. The buyer typically secures a mortgage or pays cash, and the seller receives the full purchase price at closing. For the seller, capital gains tax may apply to any profit, calculated as the difference between the sale price and their adjusted cost basis. Sellers may exclude a portion of this gain if the property was their primary residence for at least two of the five years preceding the sale, up to $250,000 for single filers and $500,000 for married couples filing jointly. The buyer establishes a cost basis equal to the purchase price for future capital gains calculations.

Gift of Equity

A gift of equity occurs when the seller sells the property below its fair market value, with the difference considered a gift. This arrangement can benefit the buyer by reducing or eliminating the down payment. For the seller, the gifted amount counts against their annual gift tax exclusion and, if it exceeds this, against their lifetime gift and estate tax exemption. The seller is responsible for filing IRS Form 709 if the gift exceeds the annual exclusion. For the buyer, a gift of equity typically results in a lower cost basis, which could lead to higher capital gains tax liability if they sell the home for a profit later.

Installment Sale

An installment sale, also known as seller financing, involves the seller acting as the lender to the buyer. The buyer makes payments directly to the seller over an agreed-upon period, often with interest. This structure offers flexibility in terms and can sometimes involve lower closing costs compared to traditional bank financing. For the seller, a primary advantage is deferring capital gains tax, recognizing the gain over multiple years as payments are received. The interest received by the seller is taxed as ordinary income. This arrangement requires formal documentation, including a promissory note outlining the loan terms and a deed of trust or mortgage that secures the loan with the property.

Preparing Necessary Documents

Transferring real estate ownership requires specific legal documents to ensure the transaction is legitimate and properly recorded. Each document defines the terms of the sale and transfers legal title. Understanding the required information for each form is important for accurate completion.

Purchase Agreement

The purchase agreement is a legally binding contract outlining the sale’s terms and conditions. It must identify the buyer and seller, provide a precise legal description of the property, and state the agreed-upon purchase price and payment terms. The agreement also typically includes contingencies, such as financing approval or property inspections, and specifies closing and possession dates.

Deed

The deed formally transfers legal ownership of the property from the seller (grantor) to the buyer (grantee). Common types include a warranty deed, offering the buyer the highest protection by guaranteeing clear title, and a quitclaim deed, transferring only the seller’s existing interest without guarantees. The deed must include the names of the grantor and grantee, a legal description of the property, and be signed by the seller.

Seller Disclosures

Seller disclosures are typically required by law and provide buyers with important information about the property’s condition. These disclosures often cover known defects, hazards (like lead-based paint for homes built before 1978), and other material facts that could affect the property’s value or desirability. The specific information required varies by jurisdiction, and sellers should complete these forms accurately to avoid future legal issues.

Promissory Note and Deed of Trust/Mortgage (for Installment Sales)

For installment sales, a promissory note and a deed of trust or mortgage are essential. The promissory note details the loan’s terms, including principal amount, interest rate, repayment schedule, and consequences of default. The deed of trust or mortgage secures the promissory note by placing a lien on the property, allowing the seller to foreclose if the buyer defaults. This document must be recorded with the local county office to establish the lien publicly.

IRS Form 709 (for Gift of Equity)

If a gift of equity is involved, the seller may need to file IRS Form 709. This form reports gifts exceeding the annual exclusion amount. It requires information about the donor and donee, a description of the gift, and its value, even if no tax is immediately due because of the lifetime exemption.

Finalizing the Purchase

Once preliminary decisions are made and documents prepared, the final steps involve executing the transaction through a formal closing process. This stage ensures the legal transfer of ownership and proper exchange of funds. Engaging experienced professionals can help navigate these procedures effectively.

Professional Assistance

Real estate attorneys, title companies, or escrow agents often facilitate the closing. An attorney provides legal advice, drafts and reviews contracts, and represents client interests, which is beneficial in complex family transactions. A title company or escrow agent typically handles administrative aspects, including managing funds and ensuring clear title. Professional roles can vary by state and transaction complexity.

Title Search and Insurance

A title search confirms the property’s legal ownership and identifies any existing liens, encumbrances, or defects. Issues like unpaid taxes, judgments, or easements are uncovered. Title insurance is then purchased to protect the buyer and lender against financial loss from any title defects emerging after closing.

Closing Day

On the closing day, all prepared documents, including the purchase agreement, deed, and any loan documents, are signed. The Closing Disclosure (CD) or HUD-1 settlement statement is reviewed, detailing all financial aspects, including closing costs, credits, and fund distribution. The buyer’s down payment and loan proceeds are collected, and funds are disbursed to the seller and other service providers.

Post-Closing Actions

After closing, the deed must be recorded with the local county recorder’s office. This provides public notice of the change in ownership and officially transfers the property title to the buyer. Other post-closing actions include transferring utilities into the buyer’s name and ensuring property tax adjustments are correctly made. All signed documents should be securely stored by both parties.