What To Consider When Buying Your Parents’ House
Knowing the home and the sellers doesn’t mean the process will be simple or straightforward. You’ll still need to keep a few considerations – which we’ll discuss in the following sections – in mind.
Your Timeline
It’s crucial to set expectations and establish a timeline when buying a house from your parents. If you’re just starting to discuss buying their home, it’s important to be clear and honest about your timelines on both sides of the transaction.
For the sale to work out, you may need to be ready to move in at the same time your parents are ready to move out. Then again, a flexible timeline may be one of the perks of buying your parents’ home.
How You’ll Handle The Transaction
Even if you don’t have to list the home and hold showings, working with a real estate professional can still have value. A real estate agent or real estate attorney can help oversee the real estate transaction. These professionals can guide you through the process and be sure that you check all the boxes so the transaction is valid and legal.
Financing Options
You’ll also need to weigh out your financing options. You may have the option of applying for a new mortgage or assuming your parents’ mortgage. Mortgage lenders may have stricter requirements and guidelines for home loans involving family members, so be sure to share all the details with them as soon as possible in the loan-seeking process.
The Details Of Non-Arm’s Length Transactions
A non-arm’s length transaction is a transaction between two people with a prior relationship outside of the transaction. This could include family members, colleagues or friends.
The IRS keeps an eye on non-arm’s length transactions because there’s a history of mortgage fraud there. Sometimes, people sell a home to relatives at a large discount in an attempt to avoid capital gains taxes.
Because of this extra IRS oversight, many lenders have stricter requirements for mortgage loans on non-arm’s length transactions. For example, you may have to make a larger down payment or pay extra due diligence. Your lender should be able to explain the process as it will apply to you.
How To Handle A Gift Of Equity
A gift of equity is when someone sells a home to a family member for below market value. That’s because the IRS sees this as a form of tax avoidance.
The seller may have to pay a gift tax if the gift of equity exceeds $15,000. It’s important to consider this tax when settling on a price for the home.
A borrower using Freddie Mac, Fannie Mae or an FHA loan must use the home as their primary residence or second home.
Legal And Tax Implications
If you’re buying your parents’ house below market value, there could be legal and tax implications. Working with a tax attorney or real estate attorney will help you better understand whether your transaction will qualify for gift taxes or capital gains taxes. If you’re not trying to buy the house for a big discount, it’s usually easiest to choose a purchase price close to fair market value.
Where Your Parents Will Go
Of course, it’s important to have a plan for your parents. If they don’t already have another home to move into, you may have to help them figure out what’s next.
Consider discussing options such as a life estate, renting back to your parents or buying a second home. Your parents could be moving into a retirement community or looking to use the proceeds from the house sale to buy a new home in a new location. This is a common practice among people who wish to downsize.
