Selling a home to a family member can be a great way to keep memories alive or make homeownership more accessible for loved ones. While this process comes with unique considerations, a well-planned approach ensures a smooth, beneficial transaction for both parties. Here’s what you need to know when selling a home to a relative in Michigan.
Understanding the Difference Between Arm’s Length and Non-Arm’s-Length Transaction
Arm’s-length transactions occur between parties who have no prior relationship with each other. A sale between family members is considered a non-arm’s-length transaction, meaning the buyer and seller have a pre-existing relationship. Because of this, lenders and tax authorities often scrutinize these sales more closely to ensure the homes are sold at fair market value and the transactions are structured correctly.
Best Practices for a Smooth Transaction
1. Work with a Real Estate Professional
Even when selling to a family member, hiring a real estate agent helps protect both parties. Agents are able to draw up paperwork, identify property disclosures, review important documents, enforce contracts and fees, and ensure all paperwork is properly completed. A good agent will help simplify the sale, ensure a smooth transaction, and maintain an objective approach throughout the process.
2. Determine Fair Market Value
Even if selling at a discount, it’s best to establish a fair market value for the home. Your real estate agent can put together a comparable market analysis (CMA) to help determine the value. Hiring an appraisal company ensures the price is reasonable and helps prevent potential tax implications.
3. Consider Financing Options
If the buyer needs a mortgage, they should be prepared for potential lender requirements. Some lenders have stricter conditions for non-arm’s-length transactions, including higher down payments or additional documentation.
Tax and Legal Considerations
Federal Tax Implications
- Gift Tax Considerations
If you sell the home for significantly less than market value, the IRS may consider the discount as a gift, which could be subject to federal gift tax rules.
- Capital Gains Tax
If the home has appreciated in value, the seller may be responsible for capital gains tax on the profit unless they qualify for an exemption, such as the primary residence exclusion.
- Loss Deduction Limitations
If selling the home at a loss, the IRS does not allow tax deductions for losses on property sales between related parties.
Michigan-Specific Considerations
- Property Tax Uncapping
In Michigan, property taxes are based on a home’s taxable value, which typically increases when a property is sold. However, certain family transfers—such as sales between parents and children—may qualify for an exemption from tax reassessment.
- Title Transfer and Recording Requirements
The transfer must be recorded with the local county register of deeds, and necessary property transfer affidavits must be filed to ensure compliance with Michigan property laws.
Structuring the Sale
- Traditional Sale
If the buyer is obtaining a mortgage, the sale should follow a standard process, including title searches, appraisals, and closing procedures.
- Seller Financing
If the seller is financing the purchase, a legally binding promissory note and mortgage should be established to outline repayment terms.
- Gift or Partial Sale
Some families structure the transaction as a partial gift by selling below market value and covering the remaining amount as a gift. Proper documentation is needed to comply with tax laws.
Final Thoughts
While selling a home to a family member can be a beneficial arrangement, taking the proper legal and financial steps is essential to ensure a smooth transaction. Consulting with a real estate agent, tax professional, or mortgage lender can help navigate potential complexities and avoid unexpected challenges. By handling the sale with the same professionalism as any real estate transaction, both buyer and seller can enjoy a fair and transparent process that benefits everyone involved.
