Selling to a Relative? Put it in Writing!

Question: What do we need to consider if we sell our home to a close relative? Specifically, are there any tax ramifications or other potential issues if we want to help our family member by selling for significantly below market value? – Anonymous

Answer: You can sell your property at a discount and offer favorable terms, but get all that in a written contract.

I have seen this favor turn sour many times. The problem most often occurs when the parties involved don't treat this as a standard business transaction.

People often seem reluctant to use a written contract when dealing with close friends or relatives, but the truth is that a detailed written contract avoids misunderstandings that lead to disputes and hurt feelings. A favorite saying of mine is, "If you can say it, you can sign it."

Another frequent mistake I often see is not getting title insurance for this kind of transaction. The owners usually say they've had the house all these years and there's nothing to worry about. But if something does pop up, the buyers may not find out about it until years later when they go to sell the house – and it may be too late to resolve what may have been a simple issue.

This type of transaction most likely will be income-tax-neutral for both you and your relative. However, everyone's tax situation is different, so you shouldn't ever make any large transaction without consulting a tax professional.

Also, your relative should understand that the transfer will cause the property taxes to be reassessed to market value, so he or she can't count on any discounts that you may have had.

Finally, if you as the seller intend to hold the mortgage for the buyer, there are certain lending laws that still need to be followed.