How to Buy Your Parents’ House

Buying a house from your parents is not exactly your average real estate transaction, but it comes with unique perks. Whether it’s the sentimental value of keeping your family home in the family or simply the convenience of dealing with a family member, purchasing a home from your parents can be a great way to step into homeownership.

That said, there are a few challenges to consider. Mixing family and finances can be tricky, and not just the emotional component of it. Both parties need to wrap their heads around important legal, tax, and financial implications. Break down the ins and outs of buying a home from your parents in this step-by-step guide.

Before You Begin Buy a Home From Parents

Before jumping headfirst into the transaction process, it’s essential to:

• Have an open and honest discussion with your parents about expectations and financial arrangements.
• Understand the long-term financial implications for both you and your parents.
• Decide whether the property makes sense for your current and future needs.
• Understand the potential tax implications. Consult a financial professional to address these implications and ensure both parties know how the transaction might affect their individual tax situations.

With these considerations in mind, let’s get to the nitty-gritty of buying a home from your parents.

Understanding the Benefits and Challenges of Buying a Parents’ House

Buying a house from your parents can be a complex and emotionally charged process. On one hand, it can be a great way to purchase a home at a lower price and avoid paying real estate commissions. It’s a way to maintain family ties. 

One of the primary benefits of buying a parent’s house is the potential to save money on the purchase price. Since the sale is between family members, you may be able to negotiate a lower price or receive a gift of equity, which can reduce your down payment and closing costs. Additionally, you may be able to avoid paying private mortgage insurance (PMI) if the gift of equity is substantial enough. 

But why are your parents agreeing to sell you the home in the first place? Is it just to transition an asset before they can’t make that decision themselves or pass away? Is it to keep a generational property in the family? Are they facing some financial hurdles and need to access the cash quickly? If money is the motivating factor, they may expect you’ll purchase at fair market value with no gift of equity.

Additionally, the sale may be subject to capital gains tax, which can be a significant burden depending on the appreciation and purchase price. Your parents foot the bill for this tax. They need to run the numbers with a financial advisor to see if they can handle it.

Moreover, the transaction may be scrutinized by lenders and tax authorities to ensure that it’s an arm’s length transaction and not a deliberate attempt to avoid taxes or exploit the system.

It can also lead to other potential pitfalls, such as emotional fallout, and not just between you and your parents. There are siblings to consider–yours and theirs– who may have opinions if they should inherit or have a stake in purchasing the home.

Start from a place of clarity and transparency to mitigate these risks. Understand your parents’ goals and make sure they know yours. Let the expectations align. Have honest conversations about the financial aspects, such as if you’ll be putting a down payment and getting a loan, or if they will have a gift of equity to lower your mortgage payments.

Work with a real estate agent, attorney, and tax professional who can guide you through the process and ensure that all parties know their rights and responsibilities.

Determine the Best Purchase Method

Not every home purchase goes through the same scenario. Buying from your parents opens the door to several unique methods. Explore which one aligns best with your family’s financial situation and goals. Additionally, consider exploring different mortgage loans and consulting a loan officer to find the best option if you’ll need financing.

Traditional Sale

The simplest option is treating this like any other home sale. Purchase the property at its current market value, and get the help of a mortgage if needed. This keeps everything straightforward, with a precise price tag and standard real estate processes– other than marketing the home on the free market. In this case, like any other home sale, you’ll make a down payment and start making mortgage payments to a lender. Your parents get the payout at the closing table.

Gift of Equity

Your parents might decide to sell the home to you below market value and “gift” you the difference as equity. For example, if the home’s market value is $300,000, your parents could sell it to you for $250,000 and gift you $50,000 in equity. This reduces your loan amount and helps you save some funds out-of-pocket. 

Be aware of potential gift tax implications (more on that later). Some proceeds from specific financial arrangements, like reverse mortgages, are not subject to income tax.

Seller Financing

Instead of going through a traditional lender, your parents could act as the bank. You’d make payments directly to them, avoiding some of the complexities of bank financing, such as credit score checks and loan applications. 

This arrangement often benefits both parties, but it should still include a formal contract to avoid misunderstandings. Additionally, it is vital to agree on a fair sales price and formalize it in the contract. 

Lease-to-Own Agreement

Not quite ready to purchase outright? You could rent the home first, with a portion of your rent payments going toward your eventual purchase. This gives you time to secure financing or improve your financial situation before buying. Consult with a tax professional to avoid unpleasant tax bills arising from such transactions.

Assess the Home’s Value

Before making an offer on your parent’s house, you must determine its fair market value. Don’t skip this step; it’s necessary to keep a fair and transparent transaction. Sometimes family members have a very different idea of what the home is worth because of emotional attachments. To land on a value:

Get a Professional Appraisal

Hire a certified home appraiser to determine the home’s current market value. This helps set the stage for a reasonable sale price for both you and your parents. Additionally, if you’re applying for a home loan, a mortgage lender will request an appraisal anyway. This way, your numbers are more likely to line up.

Compare with Local Market Prices

Do you not want to hire an appraiser? Look at similar homes in the neighborhood to understand the property’s competitive value. Knowing what these homes are listed and selling for helps with negotiations and mortgage approval.

Consider a Home Inspection

Even if you know the house like the back of your hand, hire a home inspector. They can identify potential issues or repairs that may affect your buying decision. You may love Mom and Dad’s house, but if it’s going to take $100,000 just to rehabilitate it, will that be financially wise for you? It could also help reframe the home’s value.

Getting a comparative market analysis (CMA) from a real estate agent

A comparative market analysis (CMA) is a report that estimates a property’s value based on recent sales of similar properties in the same area. A real estate agent can provide a CMA to help you determine the market value of your parents’ house. This report considers factors such as the property’s size, condition, age, and location, as well as the sales prices of comparable properties.

A CMA can be invaluable in determining a fair price for the property. By analyzing the data, you can identify trends and patterns in the local market and make an informed decision about the sale price. Additionally, a CMA can help you negotiate with your parents during the home buying process to agree on a purchase amount that reflects the property’s true value.

When selecting a real estate agent to provide a CMA, look for someone who is experienced in the local market and has a deep understanding of the area’s real estate trends.

Using online valuation tools to estimate the property’s value

Online valuation tools provide a quick and easy estimate of a property’s value. These tools use algorithms to analyze data from public records and other sources. While they can be helpful starting points, they may not be as accurate as a CMA or an appraisal when buying a house.

Our online valuation tool estimates the property’s value based on established factors such as the property’s size, location, and recent sales data. However, it’s essential to remember that these estimates may not reflect the property’s true value, especially if there are recent renovations. Always consult with a real estate agent or appraiser for a more accurate assessment.

Negotiating the Price and Terms of the Sale

Negotiating the price and terms of the sale is a key moment in buying a parents’ house. 

Once you clearly understand the property’s value, you can use this information to negotiate a fair price with your parents. Approach the negotiation respectfully and professionally, considering the emotional and financial complexities involved. If other family members are involved, be aware of their emotional and financial stake in negotiations.

Always come back to data-based factors:

• The property’s market value, as determined by the CMA or appraisal
• The sale prices of comparable properties in the area
• The property’s condition, age, and amenities
• The local market trends and conditions

By negotiating using data, you will arrive at a fair sale price that reflects the property’s true value. Whatever you agree to verbally should be put in writing as soon as possible, preferably with a legal contract reviewed by an attorney.

Additionally, be sure to discuss the terms of the sale. Have a clear understanding of:

• The payment structure, including if you will be contributing a down payment or if there will be a gift of equity. In seller financing, you’ll want a clear payment schedule with late penalties and fees defined.
• Closing costs, as even in a family deal, you must comply with local laws and regulations around transferring real estate and recording the deed.
• Any contingencies, like your ability to secure financing or having parents fix particular items before the sale closes.
• The closing date, including whether and when the parents will move their belongings from the home or if they will live there for a specified time.

Funding the Purchase

How you pay for the home is a big part of the equation. Buying a house with family members involved slightly modifies the options and considerations:

Explore Mortgage Options

Conventional loans, FHA loans, and VA loans are all possibilities depending on your eligibility and financial situation. Research costs, interest rates, and requirements to find the best fit. Discuss if you meet the eligibility criteria for a home loan, like its minimum credit score, debt-to-income ratio, and income eligibility. Different loans also have different guidelines around gifts of equity if that’s part of your purchase agreement.

Prepare for Down Payments and Closing Costs

While buying from your parents may come with some cost savings, you’ll still need to plan for a down payment, closing costs, and potential additional fees. In some scenarios, parents sell their homes to their children at reduced prices, which can benefit the child by lowering the required down payment, monthly mortgage payments, and avoiding private mortgage insurance.

Check Your Credit and Financial Plan

When approving your mortgage, lenders will look at your credit score and overall financial health. Make sure your finances are in order before applying.

Legal and Tax Considerations

This is where things can get, well, less cozy. However, understanding the legal and tax implications is critical to making your transaction smooth and trouble-free.

Transfer of Ownership

Work with a title company or attorney to ensure the ownership transfer is legally binding and all paperwork is in order. As soon as you have a written purchase agreement, hire an escrow agent to assist with the legal paperwork involved with the transfer. They will ensure all the terms are met, and funds are accounted for in the transfer.

Gift Tax and Capital Gains

If your parents are gifting funds, they may need to consider gift tax implications. Only a specific amount is tax-free, which in 2025 was $19,000. But, there’s also a lifetime limit for gifting funds, set at $13.99 million. The funds may still be tax-free if the gifted amount doesn’t exceed their lifetime limit. They will need a completed gift letter stating that the amount will not be paid back.

Additionally, capital gains tax could apply if the home has appreciated significantly in value. This is especially true if the taxpayer owns the home outright and stands to make a profit over $250,000 for single filers and $500,000 for married couples filing jointly. 

How about purchasing their second home? The IRS treats properties not designated as primary residences as investment properties, potentially leading to significant tax liabilities. 

Consulting a tax professional is essential on both ends of the deal.

Hire a Real Estate Attorney

This is one of those times when it pays (literally) to have a legal expert in your corner. They’ll ensure all agreements are solid and everyone’s interests are protected. You want the attorney to:

• Review all the terms and conditions of the purchase agreement
• Draft any legal agreements, as with seller financing

Navigating Family Dynamics

It’s one thing to discuss this over a family dinner; it’s another to make it official. Handling the emotional and financial aspects of buying from family requires clear communication. You may be surprised to hear from the other adult children about your decision to buy your parents’ home.

Set Expectations Early

Before the process begins, everyone should be on the same page. Additionally, determine if the property is the parent’s primary residence to understand the full scope of the transaction, including potential capital gains tax implications.

Put Agreements in Writing

A formal written agreement benefits everyone. Even among family, avoiding misunderstandings that could cause strain matters later.

Avoid Emotional Pitfalls

Remember, this is a financial and emotional transaction. Throughout the process, respect your parents’ needs and boundaries.

Completing the Transaction

The final stretch! Here’s what the end of the process will look like:

Transfer the Title & Close the Sale

Your title company or attorney will handle the title transfer and schedule the closing. At the closing, all necessary documents will be signed, and ownership will officially pass to you.

Finalize Loan Approval

If you’re using a mortgage, ensure all loan paperwork is completed and approved before closing. Ensuring all mortgage loans are approved and finalized is crucial to avoid delays.

The Final Step In Buying a House From Parents

By following these steps, you can confidently buy a home from your parents while keeping the process fair and beneficial for everyone involved. Remember:

• Don’t skip professional advice. Attorneys, real estate agents, and tax advisors are invaluable.
• Be patient—like any real estate transaction, this process takes time.
• Celebrate! You’re not just buying a home; you’re keeping it in the family.

Buying a house from your parents is a unique opportunity that, when handled properly, can be financially rewarding and emotionally meaningful. If you’re ready to take the plunge, start with these steps and approach the transaction carefully—it’ll be worth it. Happy house hunting!