Buying a House From a Family Member: What to Get Right

← back to all articles

Buying a home from a parent, sibling, or other family member can save everyone real money compared with selling on the open market. It can also create expensive surprises if you don't think through the tax, mortgage, and contract issues before signing. This article walks through what to think about.

The big-picture choice: gift, sale, or somewhere in between?

Most family real estate transfers are one of three things:

  1. A pure gift. Parent gives child the house, no money changes hands. Mechanically simple — usually a quitclaim deed. Tax-wise complicated: gift tax exemptions apply (currently around $19,000/year per recipient and ~$13 million lifetime as of 2026), and the child inherits the parent's cost basis (which matters when they later sell).
  2. A sale at fair market value. Family member buys at what the property would sell for on the open market. Treated like any other sale for tax purposes — clean, but you lose the family-discount benefit.
  3. A sale below fair market value. Probably the most common pattern. Tax-wise this is treated as a sale plus a partial gift: the difference between fair market value and the actual price is a gift from seller to buyer. Counts against the gift tax exemption.

Which one makes sense depends heavily on the family's estate planning situation, the parents' Medicaid exposure, and how much capital gains tax everyone is willing to pay later. This is a CPA conversation, not a "figure it out yourself" conversation — a one-hour consultation is cheap insurance against a five-figure mistake.

The five things that catch people off guard

1. Due-on-sale clauses (the mortgage lender)

If the property has an existing mortgage, almost every modern mortgage contains a due-on-sale clause: language that lets the lender demand full repayment of the loan if title transfers without the lender's consent.

The Garn–St. Germain Act of 1982 carves out exceptions for certain family transfers (transfers to a spouse, to a child, into a living trust where the borrower is the beneficiary, etc.). But this protection is narrower than people assume. Transfers from parent to child are not all covered, and transfers to siblings or nieces/nephews generally aren't.

Always call the lender before you record the deed. Most will not call the loan for a documented family transfer if you ask in advance. They might call it if they find out after the fact. Document the conversation.

2. Capital gains and cost basis (the IRS, part 1)

When a family member buys property from another family member, the buyer's cost basis is the price they paid. When the same family member inherits property, the cost basis steps up to the fair market value on the date of the deceased's death.

The implication: a parent who is likely to die in the next 5–10 years and whose home has appreciated significantly may save the child a huge amount in eventual capital gains by holding the property and letting it pass through inheritance, rather than transferring it during life. A $500,000 home with a $100,000 cost basis sold by the child after a lifetime transfer triggers $400,000 of capital gains; the same home inherited at death and immediately sold triggers near zero.

This is one of the biggest single decisions in family real estate transfers. It is not obvious. Talk to a CPA.

3. Gift tax (the IRS, part 2)

If the sale price is below fair market value, the difference is treated as a gift for federal tax purposes. The annual gift exclusion lets each person give $19,000 (2026) to each recipient without triggering gift tax reporting. Above that, the gift counts against the lifetime exclusion ($13M+ as of 2026; subject to change). At very high amounts, actual gift tax applies.

For most families, this isn't an out-of-pocket cost (the lifetime exclusion is huge), but it does require filing a Form 709 gift tax return for the year of the transfer. CPA territory.

4. Property tax reassessment (state-specific, big in California and others)

Many states reassess property tax basis at the time of transfer, sometimes resulting in big jumps in the annual tax bill. California's Proposition 13 limits annual increases, but transfers can trigger reassessment to current market value — potentially thousands of dollars more per year.

California has narrow exceptions for parent-child transfers (Proposition 19 in 2021 sharply curtailed what used to be a broad exception). Other states have varying rules. Check before transferring.

5. Medicaid five-year look-back (estate planning)

If a parent transfers property below market value within five years of applying for Medicaid long-term care benefits, Medicaid will treat the transfer as a disqualifying gift and impose a penalty period during which Medicaid won't pay. This can be financially devastating for families.

If anyone in the family is approaching the age where long-term care is plausibly 5–10 years out, talk to an elder law attorney before transferring real estate to family. This trap snares many well-meaning families.

What instrument to use

For most family transfers, a quitclaim deed is the right choice — see our comparison article. It's the simplest instrument, doesn't create warranty liability for the seller, and is widely accepted in family contexts.

If the buyer is paying significant money (especially if they're getting financing), some lenders prefer a warranty or grant deed. Ask the lender what they require.

The basic execution sequence for a family sale

  1. Have the conversations with everyone affected — siblings who might have expected to inherit, the other parent, etc. Family real estate transfers that surprise other relatives end up in court.
  2. Talk to a CPA about cost basis, capital gains, gift tax, and any state-specific tax considerations.
  3. Talk to the lender if there's an existing mortgage, and get a no-acceleration commitment in writing if possible.
  4. Talk to an elder law attorney if any of the older parties might need Medicaid long-term care within the next 5 years.
  5. Get an appraisal to document fair market value. Even for "love and affection" transfers, having a contemporaneous appraisal protects everyone if the IRS asks questions later.
  6. Sign a written contract, even if it's short and simple. Email confirmations are not enforceable for real estate. See our private sale contract article.
  7. Sign and record the deed. This is where ClosingDesk comes in.
Start the deed transfer ($199) More guides

This article is general information, not legal, tax, or financial advice. Family real estate transfers have meaningful tax and estate-planning consequences that vary by state and by individual circumstances. Talk to a CPA and a real estate attorney before signing.