Guide to Taxes & Financing

Main points to consider:

• Buying your parents’ house is legal but involves additional lender requirements.
• A gift of equity can help reduce upfront costs, although some cash may still be necessary for closing.
• Short-term savings may have long-term implications for taxes and estate planning.

Purchasing a property from your parents, whether it’s a primary residence in Tacoma or a vacation home in Salt Lake City, can be a strategic way to maintain real estate within the family while building wealth over time. However, these transactions are categorized as non-arm’s-length sales, leading to increased scrutiny from lenders and adherence to tax regulations compared to a standard home purchase.

Many buyers can take advantage of a gift of equity to acquire their parents’ home with zero down payment and avoid private mortgage insurance (PMI). It’s vital to balance family dynamics with formal requirements such as appraisals, contracts, and tax filings to ensure a smooth transfer of ownership.

Is it possible to buy your parents’ house?

Absolutely, purchasing your parents’ home is legally permissible. There are no laws prohibiting real estate transactions among family members. However, due to the existing relationship between buyer and seller, lenders view these transactions as non-arm’s-length deals.

Lenders exercise caution in these situations to prevent mortgage fraud or equity skimming. To secure approval, you will likely require:

1. A professional appraisal to validate the Fair Market Value (FMV).
2. A formal purchase agreement (even without involving a real estate agent).
3. Clear documentation proving any below-market price is a genuine gift of equity.

Benefits of purchasing a house from your parents:

In addition to the sentimental value of retaining your childhood home, there are substantial financial and practical benefits:

• Avoiding competitive bidding: You can skip the stress of a competitive market and negotiate directly with trusted individuals.
• Utilizing a gift of equity as a down payment: This is a significant advantage in family sales. For instance, if the home’s value is $400,000 and your parents sell it to you for $320,000, the $80,000 difference can serve as your 20% down payment, potentially enabling you to purchase with no upfront costs.
• Understanding the home’s history: You are already aware of any past issues like a leaky faucet or an aging roof, reducing the surprise expenses associated with buying from strangers.
• Flexible closing timelines: Families can often coordinate moving dates more conveniently than traditional buyers and sellers.
• Effective estate planning: Selling the home to a child can aid parents in downsizing while converting assets for retirement or simplifying their future estate.

How to proceed with buying a house from your parents

Although this is a family transaction, it should adhere to the crucial steps involved in a standard home purchase to safeguard both parties. Here’s the typical process:

1. Establish the price and evaluate a potential gift of equity (if applicable)

Begin by agreeing on a purchase price with your parents. Many families opt for a gift of equity, where parents sell the property below its appraised market value, considering the difference as part of your down payment. In instances where the gift of equity is substantial, it may cover the entire or a portion of the required down payment and, in some cases, diminish or eliminate the need for private mortgage insurance (PMI). Nevertheless, buyers might still be accountable for closing costs or upfront expenses, depending on the lender and loan program. A lender-approved appraisal is essential to validate the property’s value and ascertain the amount of equity that can be applied.

“When contemplating the purchase of your parents’ home, pertinent financial inquiries often arise,” states AdvisorFinder. “How do gift of equity arrangements impact taxes? What are the estate planning implications? How should the sale price be structured? Financial advisors specializing in real estate and estate planning can assist in evaluating these interconnected decisions.”

2. Obtain an independent appraisal and inspection

Engage a professional appraiser to verify the property’s fair market value. Even if you grew up in the residence, it’s crucial to conduct a professional inspection to uncover any potential issues that could impact the property’s value or your loan approval.

3. Collaborate with a real estate attorney or financial advisor

As a family transaction, purchasing from relatives is considered a non-arm’s-length deal. Therefore, professional guidance can help prevent legal complications, lender delays, or IRS entanglements.

Key Financial and legal considerations:

• Gift tax reporting: Each parent can gift up to $19,000 annually in 2026 without reporting. Gifts exceeding that threshold necessitate IRS Form 709.
• Lifetime exemption: Unless surpassing the $15 million lifetime exemption ($30 million for married couples), most parents won’t incur gift taxes.
• Fair Market Value (FMV): Establishing a fair price through a professional appraisal is crucial. Selling significantly below market value can result in lender rejection or undesirable tax implications.
• Capital gains and step-up: Acquiring now means inheriting your parents’ tax basis. Inheriting later could provide a step-up in basis, reducing future capital gains.
• Estate and probate planning: Concluding a sale removes the property from your parents’ estate. However, it’s essential to ensure this aligns with their long-term care plans and doesn’t create inheritance imbalances among other siblings.
• Medicaid look-back: Selling below market value within five years of applying for Medicaid can lead to penalties.

4. Determine financing or payment terms

Apply for a mortgage, and disclose to your lender that it’s a family sale. Lenders might require additional documentation to validate the legitimacy of the transaction.

Common financing approaches:

• Traditional mortgage: The conventional route involves applying for a standard mortgage. You’ll undergo the same approval process as any other buyer, but due to the family sale nature (“non-arm’s length” transaction), lenders may request extra documentation to ensure the deal aligns with fair market value.
• Seller financing directly with parents: Instead of involving a bank, your parents may opt to finance the purchase themselves. In this scenario, you make monthly payments directly to them based on agreed-upon terms. While offering flexibility, this arrangement should be documented in writing to prevent misunderstandings.
• Assuming an existing mortgage (if applicable): If your parents’ mortgage is assumable, you may be able to take over the loan rather than securing a new one. This can be advantageous if the current loan has a lower interest rate, but not all mortgages permit assumption, necessitating lender approval.
• Paying cash: If you can afford to purchase the property outright, paying cash eliminates interest expenses and expedites the process. However, financing may be more prudent if you prefer to maintain liquidity or benefit from mortgage-related tax deductions.

Strategies for structuring the purchase:

• Standard home sale (at fair market value): Approaching the deal like any other transaction—your parents sell at the appraised value, you secure financing, and ownership is transferred at closing. This minimizes most tax complications but may incur higher costs.
• Below-market or symbolic sale: Some families opt for a price below market value or even a nominal amount. The variance between the sale price and market value is deemed a gift of equity, potentially reducing upfront expenses but possibly triggering gift tax reporting requirements.
• Gift of the entire or partial property: Parents can transfer ownership as a complete or partial gift. While streamlining the process, this approach has tax and inheritance implications necessitating review with a tax advisor.
• Addition to the deed or co-ownership: Parents can include you as a co-owner, enabling a gradual transfer and aiding in estate planning. Nonetheless, this entails shared responsibility for the property until complete ownership transfer.

Tip: Each of these methods carries distinct tax, legal, and financial consequences, prompting consultation with an attorney or tax professional before selecting the appropriate path for your family.

5. Finalize the agreement and transfer ownership

To progress from a verbal agreement to legal ownership, you must first draft and sign a formal purchase agreement with the assistance of a real estate attorney or agent. This contract serves as the basis of the sale, outlining the final purchase price, the specific gift of equity amount, and a transparent closing timeline to prevent future disputes with the IRS or other family members. Once the agreement is signed, the final phase involves clearing the title and formally transferring the deed. You will collaborate with a title company to conduct a comprehensive search, ensuring the property is free from prior family debts, undisclosed liens, or property line conflicts that could jeopardize your ownership. On the closing date, you will sign the ultimate loan documents and deed, which the title company will then register with the county. To conclude the process, you must update local tax and legal records, inform your insurance provider, and confirm your parents possess the necessary documentation for their tax filings.

Advantages and disadvantages of purchasing your parents’ house

Here are the pros and cons of acquiring a property from your parents.