Precautions To Keep In Mind When Buying A House From A Family Member

Buying real estate property from a close relative is tricky. On one hand, you don't want to ruin your relationship with the relative; on the other hand, you want to protect your investment, and these two objectives don't necessarily go together. Keep these tips in mind to enjoy a successful purchase without any fallout:

Involve a Real Estate Agent

The first advice is to make the purchase legally binding, and the best way to do this is to use real estate agents. The agent will see to it that every legal check is made, and all the necessary paperwork is duly filled and filed. If you go it alone because you "know each other well," you risk making mistakes that may haunt you somewhere down the line. Even if you have decided on the price without the realtor's input in the negotiations, you may still need them to handle the paperwork and ensure everything is above board. Just to give you a hint on how much paperwork is involved, just know that property purchase contracts can run hundreds of pages long.

Don't Ignore the House Inspection

If you are buying from a relative, there are high chances that you have visited the house in question several times. This may make you think that you know the property well enough to skip an inspection, but that would be a grave mistake. You may be conversant with the cosmetic or highly visible issues such as the leaky toilet or the termite infestation a few years back, but the house inspection will reveal much more than that. Do you want to be surprised by an inefficient heating system, an electrical wiring that isn't up to code or a poor drainage system that is affecting the foundation? Expect such things if you skip the inspection.

Be Careful Of a Steeply Discounted Purchase

Lastly, you also need to be cautious before accepting a huge discount and buying the property at less than a fair market price. The IRS may order an audit and treat the difference between the fair market price and the actual purchase price as a gift. Don't forget that gifts are usually taxable even if they are from family members, so you can end up with a gift tax obligation after buying a house! There is also the risk that you will owe the IRS a huge capital gains tax if you decide to sell the property a few years later at its fair market value (which will be seriously higher than the price you paid for it).

It's not that you shouldn't accept a huge discount from your relative, but you should consult a tax professional (your agent can hook you up with one) before proceeding with the purchase. The professional may advise you on what to do to minimize the tax obligations (that is beyond the scope of this article).