While the idea of selling your house to your spouse or any other family member seems like a smart one, it’s a little more complicated than most people realize.
It seems like the no-fuss option, right? You can manage the sale without any professional help, which helps to save money on both ends. But, this is not always the case. Ever heard of the IRS? That’s right, you could face serious tax implications if you’re not careful!
Here’s how to sell your house to your spouse, the right way.
Why Selling to a Family Member Is Different
So, what’s the big deal about selling your house to your partner or any other family member, anyway? Here’s why it’s different from selling your home to a stranger/someone you don’t know that well.
A home sale between you and a stranger is called an ”at arm’s length transaction” by the IRS. Basically, this means you and the homebuyer agreed on a sale fee without any influence from each other. During this type of transaction, you negotiate a sale price via an appraiser who works on behalf of a lender (most of the time).
But, when you choose to sell to a family member, such as your spouse, this is not considered an ”at arm’s length transaction”. Instead, the IRS views this as a ”controlled transaction”.
During this transaction, the IRS closely analyzes whether your home sale price reflects fair market value. If not, they might classify the home sale as ”gift-giving” when offering a price far below market value. And this comes with tax implications that you cannot avoid!
Gift Pricing According to the IRS
What defines ”gift-giving” when you want to sell a house to your spouse? Anything that falls below fair market value. However, you don’t always have to pay tax on this — there are certain exclusions that count.
For example, gift-giving exclusions are amounts up to $16,000 for individuals and $30,000 for married couples. So, if you sell your home at a maximum of $30,000 below the average market value, you won’t need to pay tax on this amount to the IRS. $30,000 is the maximum amount you can discount the sale before you must report it to the IRS and pay tax.
Before you think about selling a house to a partner or family member, do your homework on the fair market value of the home. Or, consult with a realtor or home appraiser for accurate information. Find out more, here.
And just an FYI — the buyer does not pay the gift tax, the seller does!
How To Sell Your House to Your Spouse in 5 Steps
Now that you understand a little more about the tax implications of selling a home to a family member, here’s how to be smart about the process.
1. Come to a Mutual Understanding and Agreement
Before you talk about money and pricing, you both need to understand the process of selling a home to a spouse. At the end of the day, you both need to understand how this process works in order to minimize confusion and any potential conflict down the track.
Important points to discuss include how your spouse will finance the purchase. The timeline of events and when they will make the purchase. It’s also vital that you establish who the key decision-maker is during this process (for both parties). These ground rules will keep the transaction smooth and conflict-free.
2. Consider Hiring Professional Help
No matter how solid your relationship is with your spouse, it’s sometimes best to leave these types of transactions to the professionals. For the sake of your relationship, you might want to consider hiring a realtor or home appraiser to walk you through the process.
Ultimately, it’s their job to oversee any potential hiccups along the way and work through any disagreements over fees or the contract. A realtor can draw up an appropriate contract, organize paperwork, and process all state-required disclosures. They can also advise on any tax implications that might come up.
If you’re worried about finances, many agents/realtors will work for a flat fee or even a discounted commission rate.
3. Have Your Home Evaluated
As mentioned, it’s super important that you sell your home for the right price, according to fair market value. This is not something you can gauge accurately by ”guestimating” what your home is worth.
For this task, you want a professional home appraiser to evaluate your home. These professionals offer a comparative analysis of your home’s worth, which will help you to sell for the right price.
4. Always Discuss and Agree on Price
It goes without saying that the devil has a name, and that name is ”money”. No matter how solid your relationship, money could cause a major rift. If you fail to openly discuss the selling a price and come to a mutual agreement on it, this could cause major problems down the line.
Make sure to draw up a relevant purchase contract that you both look over, agree upon, and sign off.
5. Work With a Professional on Closing
Closing on a home sale is a complicated legal process. If your spouse (the buyer) uses a lender, you’ll go through a traditional closing process. This includes a title company and you’ll most likely work with a real estate lawyer to sign things off.
If your spouse chooses the seller-financed route, you’ll need a promissory note, i.e. a contract, that includes the loan term. You’ll then have to lodge this with your local government. Sounds complicated right? Best to work with a professional who knows what they’re doing!
Real Estate Talk at Your Fingertips
This is just a summary of how to sell your house to a spouse. The process takes time, plenty of paperwork, and many open discussions between you and your loved one. It’s not always as cut-and-dry as people expect!
Do your homework and bolster your knowledge of all things real estate by exploring the rest of this site for more.
