When your friend wants to buy your house, it can greatly simplify the whole sales process. You won't need to go through a marketing process to find a buyer, and the negotiation could be easier since you and your friend can, hopefully, work disputes out together in an amiable spirit. However, just because you're friends doesn't mean that you don't have to follow the law. Furthermore, helping your friend though the sale could have tax ramifications.
Selling your house to your friend doesn't make your state's real estate laws go away. Most states require you to disclose facts about your property such as defects, environmental problems or hazards in the surrounding areas. In addition to your state's disclosure laws, you will also have to make federally mandated disclosures, like the lead paint disclosure for houses built before 1978. If you don't follow these laws, your friend could come back and sue you. In that instance, you could lose money and a friendship.
While you don't need the services of a real estate agent to find a buyer, you may still need one to handle the sale transaction. Following disclosure laws is a part of this process, but you will also need to generate a legal purchase and sale agreement, as well as handle inspections and the loan process. If you have access to the correct documents, expertise and relationships, you can do this yourself. Another option is to hire a real estate agent or attorney to manage the transaction for you. For a fee that should be significantly less than a traditional commission, you can leverage that professional's experience to ensure that your sale to your friend is legal, binding and successful.
If you're selling your house to your friend at fair market value, there aren't any special tax considerations. However, if you decide to do your friend a favor and sell your house to him at a discounted price, you could end up with a tax issue. The IRS considers that discount to be a gift, so if you sell a $200,000 house to a friend for $150,000, you've given him a $50,000 gift. As of 2013, you can give $14,000 per year in gifts to certain people tax-free, but anything over that may be subject to gift tax. You also have, as of the 2013 tax year, a $5.25 million lifetime gift tax exemption. As long as you have exemption value left you can use it to avoid paying gift taxes. You will, however, have to file a gift tax return.
Loans to Friends
If you decide to carry the loan on the property to help your friend out, it could also be a gift. As long as the interest rate that you charge is at the market rate for similar loans, there are no special tax consequences. Your friend can deduct the interest he pays you as mortgage interest as long as you tie the loan to the property, and you will have to pay income tax on it as interest income. However, if you offer your friend a low-interest or no-interest loan, it could be taxable. The IRS can tax you on the market rate interest that you "should" have charged, and then act as if you gifted that money to your friend. This rule comes into full force if you lend more than $100,000 at a low- or zero-interest rate.
- Money Crashers: What Is the Gift Tax – IRS Rules, Rate & Maximum Exclusion Limit 2012
- Law Offices of Shannon P. McNulty: Taxing Generosity: The Surprising Tax Implications of Loans Between Friends and Family Members
- Nolo: Required Disclosures When Selling U.S. Real Estate
- Sheppard, Uziel, Sussman and Rose: For-Sale-By-Owner (“FSBO”) Transaction Work
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