Family Loan: Giving the Gift of Equity in a Non-Arm’s Length Transaction
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’s 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-arm’s 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-arm’s 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.