Tag Archives: selling homes

Will I Be Penalized If I Sell My House to my Kids?

Selling your house to your children can be mutually beneficial. If you’re looking to unload the asset and have retirement on your mind, selling your home to your kids at a low price can help your situation and their credit. It is possible to sell your home at a low price to your kids, but there is a possibility of incurring penalties. The short answer to the question is yes—if you sell the house below half of its market value, there will be penalties.

Forgiving Debt

Some homeowners sell their homes to their children for the fair market value of the home. Years later, they simply forgive the debt. This can incur a penalty for two reasons—the IRS will view this as a large gift and the value of the home will be taxed. Also, your children may be taxed on the difference between the home’s original value and its current assessed value.

How Low Can You Go?

The IRS will charge your children capital gains tax if you offer them the house at less than half of its fair market value. To avoid this tax, you must sell the house to them at above 50 percent of its value.

Gift Limits

If you’re hoping to get around that 50 percent rule without a penalty, you can legally gift a maximum sum of money to another person without taxation (check with your accountant or the IRS—this amount varies from year to year). You can give each of your children the maximum amount in cash gifts (as can your spouse, if applicable, separately). They can then purchase the house at above 50 percent of its value and remit payment using the funds you have provided. This is legal but a tricky process best conducted under the supervision of a trusted accountant and real estate attorney.

Hire Professionals

Conducting real estate transactions is always best done with the help of seasoned professionals, like a Minneapolis realtor with experience in handling paperwork. Real estate lawyers specialize in ensuring the smooth and legal transactions of real estate and they are well worth the investment. Real estate lawyers can also double-check your paperwork and file everything through the proper channels. Additionally, your accountant is an excellent resource regarding the IRS and what they are allowed to tax. If possible, you and your children should see the same accountant come tax time to ensure consistency in the paperwork.

Transactions occurring between family members typically incur greater attention from the IRS. If you proceed with sales of Eden Prairie homes under the guidance of your accountant or tax adviser, you stand a better chance of avoiding penalties from the IRS.