When you have real estate to sell, going to your family members first might seems like a win-win for everyone. They could get a great deal, and you’d be able to stop worrying about property you don’t want anymore. This can be especially appealing when you want a quick sale. However, there are tax implications that you’ll want to think about upfront. You don’t want to get an unpleasant surprise from the IRS.
4 Things to Consider When Selling Property to Family
Put simply, selling real estate to relatives can get complicated fast. These transactions often need to be considered against the tax law ahead of time to make sure you’ll be in the clear. There are a few specific consequences to these decisions. If you overlook the finer details, you’ll likely face a slew of problems down the road.
1. Real Estate Sales vs Gifts
It can be tempting to sell a house or property to a family member at a fantastic discount. But you may end up in more trouble than it’s worth. For truly “sweetheart deals,” the IRS may look at your transaction as a gift, rather than a legitimate sale. That’s why it’s important to stick within a reasonable fair market value for the property.
While you can still try to work in a discount, a good rule of thumb is to keep the transaction no less than 25 percent of the current property value. Scheduling an appraisal will help you run the numbers before the official transfer date. Fact-checking with an experienced real estate agent and tax preparer can help keep you on track too.
2. Remainder Interest Transfers
Without a little research, you might also experience a few hiccups for transferring your estate. Some homeowners want to transfer an interest in their property while they are still living in the home. But this could mean skipping out on the tax-free home gain exclusion. There are a lot of moving parts for estate planning. Again, talking with a professional in advance can help you think through the best- and worst-case scenarios.
3. Legal Agreements for Installments
Selling business property with an installment plan could also have some unintended tax consequences. On the one hand, you’ll likely have the option to defer your tax on that gain. But if your real estate is sold to a related party who then sells it on their own in a two-year timeframe, then the remainder of your tax could be due immediately.
The details here are simplified, but hopefully they give you some food for thought. Reviewing your legal agreement of the sale for the proper language prohibiting the disposition of the property over that two-year period would be wise.
4. Related Property Transactions
Trading business property or other investments for similar property might sound appealing as well. Once again, though, this can lead to trouble without the right plan in place. Avoiding taxable gains through a like-kind exchange isn’t that simple anymore. Reviewing the current tax law and recent legislation with your local accounting firm can help you consider all of the nuances for your upcoming tax return and beyond.
Let our team at NSO and Company help you consider your tax implications before you sign on the dotted line. We’re always happy to connect you with real estate and legal professionals to help ensure your tax responsibility doesn’t lead to anything unexpected later on. Just give us a call at (317) 588-3131 to schedule your consultation. We are here to help!