Homebuyers
Family Loan: Giving the Gift of Equity in a Non-Arm's Length Transaction
June 25, 2019
Want to give a younger relative a healthy head start financially, or to keep a sentimental home in the family? Whatever the situation, buying or selling a home to a family member can be a win-win situation. Here are a few things you should know to help the transaction go smoothly.
Non-Arm's Length Transaction
When the buyer and seller have an existing relationship, this is called a non-arms-length transaction. Because of the existing relationship, there are some government and lender guidelines to follow. The IRS may keep a closer eye on non-arms length transactions, but if you follow the recommended guidelines your transaction should stay on track.
For example, be sure to have an inspection to protect the buyer, and hire a home appraisal agent early on so you know the fair market price of your home. This way, the buyer and the seller can come to a fair agreement on the price of the home without raising any red flags.
Gift of Equity
Giving a gift of equity, or selling your home to a family member below market value, can be a great way to help your loved ones financially. However, selling your home to a family member for a low price has its own set of rules. Most lenders allow the gift to go toward a down payment and the process requires a gift of equity letter that both the buyer and seller will sign.
When giving a gift of equity, frequently from parent to child, it's important to keep in mind things like possibly triggering a gift tax, and potentially affecting sales of comparable homes in the area if you sell well below market value. Don't worry, you won't have to learn all the ins and outs for yourself; You can consult with a lender who knows the rules and can guide you.
With a little preparation and research, you and your family member will be exchanging keys and signing on the dotted line in no time! If you need help transferring property to a family member or giving the gift of equity, contact New American Funding – we can help.