Can I sell my house to a family member below market value?

Selling house below market value

There are many reasons why someone will consider selling house below market value – but this kind of act can cost you a hefty tax bill if you don’t take the appropriate steps.

This blog post will discuss the pros and cons of selling your house to a family member below the market price.

Selling A House Below Market Value

Selling house below market value means pricing your property below its perceived cost. The market value of your home is estimated by conducting a comparative market analysis of comparable homes. 

Moreover, the home’s fair market value is often identified when buyers put in their offers. Note that when you selling under market value, you still have to pay for closing costs, including title charges, property transfer taxes charged by local governments, escrow, attorney fees, capital gains taxes, etc. This is why selling low on the traditional market is only sometimes suggested. 

Meanwhile, when a cash buyer gives you an offer below fair market value, you won’t have to pay closing costs, repairs, agent fees, or soft costs like handling open houses and lender delays. 

Is Selling A House To A Family Member Legal?

Legally, you can sell your property to anyone – including your children. But you’ll need to consider some significant tax and lending implications if you sell your home to your children for less than its market value.

The Tax Implications Of Selling A House Below Market Value

Selling a property for less than the market value can have tax implications for you as the seller and the buyer. If you are planning to sell house to family member at below-market value, you should be aware that the following taxes might be due:

Inheritance Tax

If you sell a property to a family member for less than market value, the difference between the price you have agreed to and the market value is considered a ‘gift.’ If you, as the seller, die within 7 years of the sale, this gift will be regarded as part of the inheritance, and IHT will be due.

The deceased’s estate generally pays inheritance tax unless the threshold has been reached within seven years before the death, in which case the gift receiver has to pay for the tax.

Capital Gains Tax

If the property you plan to sell to a family member under market value is not your primary residence, you will still have to pay CGT. Usually, you must pay tax on the difference between the amount you bought the house and what you sold it for.

However, what’s important to note here is that if you sell the property for less than what it’s worth, the CGT will be calculated using the market value at the time of the sale.

Higher Stamp Duty Land Tax

If a family member sells the property, you might have to pay Stamp Duty Land Tax. However, buyers must consider that the tax will be calculated based on the property’s market value, not the sales price. So, selling a property to a family member below market value won’t reduce the stamp duty they pay.

This is an essential consideration for the buyer and should be considered. We recommend discussing this with a solicitor before signing any contracts.

Legal implications when selling a property below market value

There might also be legal implications if you want to sell your home for a lower price than its market value. It could be seen as a deliberate undervalue, leading to an impact that a legal expert can explain.

If you’re looking to sell a property at less than it’s worth to avoid paying care home fees, then you may find that the local authority takes a closer look at the transaction – and they may go back several years to see whether you have deliberately tried offloading assets to save on care costs.

You must seek professional advice from an experienced solicitor to understand all the legal implications of selling a property under market value.

Selling a property at a discount to your children or other family members

By selling your home to a family member or friend, you’ll be helping them establish wealth and equity for the future, but make sure to do it strategically and legally. Consider the tax implications of a lower sales price. Real estate agent selling to family members are considered controlled transactions.

This means lenders and the IRS treat these deals differently than an arm’s length transaction between two parties acting in their interests. If you’re selling the home beneath market value, the IRS may consider the property transfer a gift, in which case a gift tax may apply. Discuss with an accountant or financial planner how a gift tax affects your estate planning and tax liability.

To ensure a seamless process, especially when dealing with a land contract between family members, it’s crucial to document all agreements in writing.

Tips for selling to a family member

Whether selling to a family member or a stranger, you should ensure your home sale is well-organized. Here are some tips for selling a house to a family member

Hire professionals 

Hire at least one real estate agent and one real estate attorney to help make sure documentation is filed correctly on closing day. It takes a lot of paperwork to sell a house, especially when selling below market price. Ensure all state-required property disclosures and tax documents are professionally handled and filed. 

Determine a fair price for the house

You and your family member may already have a ballpark figure in mind for what the home should sell for. But if for nothing other than tax purposes, it’s still essential to have an accurate gauge of the home’s fair market value at the time of sale. You can identify the market value of your home in a few different ways.

Put everything in writing

Document all terms and agreements of the home sale. Everyone does business differently, even if you have an excellent relationship with the person you’re selling to. Make sure to keep copies of verified documents throughout the transaction and after the transaction has been completed. 

Double check with tax laws

The IRS may think you’re trying to avoid paying capital gains or income tax if you don’t adequately disclose that you’re selling below market value. Your tax attorney will be able to guide you through this process, so make sure to consult with them before closing.

Final Thoughts

By selling your home to a family member, you’ll be helping them establish wealth and equity for the future, but make sure to do it strategically and legally. Consider the tax implications of a lower sales price. Real estate deals between family members are considered controlled transactions. Complete key steps like the inspection and engage the assistance of a real estate expert and tax advisor.

With these guardrails, you can usually sell your house to a family member without trouble. It is vital to consult a solicitor if you are planning on selling a property to a family member at below market value before you do anything else. A legal advisor can explain all the pitfalls and implications and help you find the best solution for you and your family members.

Paul Johnson

Paul is a reputable local house-buying professional, also a real estate agent (Virginia). Count on his nearly fifteen (15) years of expertise in being part of resolving any issues that may threaten transactions, being accessible, and answering questions, as well as remaining transparent throughout closing transactions. One of Paul's Favorite Quotes: "To Give Anything Less Than Your Best Is To Sacrifice the Gift."

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