How to Buy Your Parents’ House: Steps, Tax Rules, and Gifts of Equity

Key takeaways:

• Buying from your parents is legal but comes with extra lender requirements.
• A gift of equity can lower upfront costs, but you may still need cash to close.
• Short-term savings can come with long-term tax and estate tradeoffs.

Buying a house from your parents, whether it’s a family home in Tacoma or a vacation property in Salt Lake City, is a strategic way to keep real estate in the family while building long-term wealth. However, these transactions are legally classified as non-arm’s-length sales, which makes lender scrutiny and tax rules more important than in a typical home purchase.

By leveraging a gift of equity, many buyers can purchase their parents’ home with zero down payment and avoid private mortgage insurance (PMI). To ensure a smooth transfer, it’s important to balance family dynamics with formal requirements like appraisals, contracts, and tax filings.

Can I buy my parents house?

Yes, you can legally buy your parents’ house. There are no laws preventing real estate sales between family members. However, because of the existing relationship between buyer and seller, lenders classify these deals as non-arm’s-length transactions.

Lenders are more cautious with these deals to prevent  mortgage fraud or equity skimming. To get approved, you will likely need:

1. A professional appraisal to verify the Fair Market Value (FMV).
2. A formal purchase agreement (even if you aren’t using a real estate agent).
3. Clear documentation showing that any below-market price is a legitimate gift of equity.

Why buy a house from your parents?

Beyond the sentimental value of staying in your childhood home, there are significant financial and practical advantages:

• No bidding wars: You skip the stress of a competitive market and negotiate directly with people you trust.
• Gift of equity as a down payment: This is the biggest “hack” in family sales. If the home is worth $400,000 and your parents sell it to you for $320,000, that $80,000 difference can be used as your 20% down payment, often allowing you to buy with $0 out of pocket.
• Knowledge of home history: You already know about that leaky faucet or the 10-year-old roof, reducing the “hidden costs” that come with buying from strangers.
• Flexible closing timelines: Families can often coordinate moving dates more easily than traditional buyers and sellers.
• Strategic estate planning: Selling the home to a child can help parents downsize while liquidating assets for retirement or simplifying their future estate.

How to buy a house from your parents

Even though this is a family transaction, it should still follow the same key steps as a standard home purchase to protect both sides. Here’s how the process typically works:

1. Set the price and consider a gift of equity (if applicable) 

Start by agreeing on a purchase price with your parents. Many families use a gift of equity, where parents sell the home below its appraised market value and count the difference as part of your down payment. In many cases, if the gift of equity is large enough, it may cover all or part of the required down payment and, in some cases, reduce or eliminate the need for private mortgage insurance (PMI). However, buyers may still be responsible for closing costs or prepaid expenses, depending on the lender and loan program. A lender-approved appraisal is required to confirm the home’s value and determine how much equity can be applied.

“When considering whether to buy your parents’ home, key financial questions often arise,” adds AdvisorFinder. “How does the gift of equity arrangements affect taxes? What are the estate planning implications? How should the sale price be structured? Financial advisors who specialize in real estate and estate planning can help you evaluate these interconnected decisions.”

2. Get an independent appraisal and inspection

Hire a professional appraiser to confirm the home’s fair market value. Even if you grew up in the home, it’s still important to get a professional inspection to uncover any potential issues that could affect the property’s value or your loan approval.

3. Work with a real estate attorney or financial advisor

Buying from family is a non-arm’s length transaction. Because of this, professional guidance can help prevent legal issues, lender delays, or IRS complications.

Key Financial and legal considerations:

• Gift tax reporting: Each parent can gift up to $19,000 annually in 2026 without reporting. Gifts above that amount require IRS Form 709.
• Lifetime exemption: Most parents won’t owe gift taxes unless they exceed the $15 million lifetime exemption ($30 million for married couples).
• Fair Market Value (FMV): You must establish a fair price via a professional appraisal. Selling too far below market value can trigger lender rejection or unwanted tax complications.
• Capital gains and step-up: Buying now means you inherit your parents’ tax basis. Inheriting later could provide a step-up in basis, reducing future capital gains.
• Estate and probate planning: A completed sale removes the home from your parents’ estate. However, you should ensure this aligns with their long-term care plans and doesn’t create inheritance imbalances with other siblings.
• Medicaid look-back: Selling below market value within five years of applying for Medicaid can result in penalties.

4. Decide on financing or payment terms

Apply for a mortgage, and disclose to our lender that  it’s a family sale.. Lenders may require extra documentation to confirm the sale is legitimate. 

Common financing approaches:

• Traditional mortgage The most common approach is to apply for a traditional mortgage. You’ll go through the same approval process as any other buyer, but since this is a family sale (a “non–arm’s length” transaction), lenders may ask for extra documentation to ensure the deal reflects fair market value.
• Seller financing directly with parents: Instead of going through a bank, your parents may agree to finance the purchase themselves. In this setup, you make monthly payments directly to them based on agreed-upon terms. This option can offer flexibility but should always be formalized in writing to avoid misunderstandings.
• Assuming an existing mortgage (if applicable): If your parents’ mortgage is assumable, you may be able to take it over instead of getting a new loan. This can be beneficial if the existing loan has a lower interest rate, but not all mortgages allow assumption, and lender approval is required.
• Paying cash: If you have the means to buy the home outright, paying cash eliminates interest costs and speeds up the process. However, financing may be smarter if you want to preserve liquidity or take advantage of mortgage-related tax deductions.

Ways to structure the purchase:

• Traditional home sale (at fair market value): Treating the deal like any other transaction—your parents sell at the appraised value, you secure financing, and ownership is transferred at closing. This avoids most tax complications but may be more expensive.
• Below-market or symbolic sale: Some families choose a price below market value or even a symbolic amount. The difference between the sale price and market value is considered a gift of equity, which can reduce upfront costs but may trigger gift tax reporting.
• Gifting all or part of the home: Parents can transfer ownership as a full or partial gift. While this simplifies the process, it also has gift tax and inheritance implications that require review with a tax advisor.
• Adding yourself to the deed or co-ownership: Parents can add you as a co-owner, allowing a gradual transfer and aiding estate planning. However, this means sharing responsibility for the property until full ownership transfers.

Tip: Each of these methods comes with different tax, legal, and financial consequences, so it’s best to consult with an attorney or tax professional before deciding which path is right for your family.

5. Finalize the agreement and transfer ownership

To move from a verbal agreement to legal ownership, you must first draft and sign a formal purchase agreement with the help of a real estate attorney or agent. This contract is the foundation of the sale, detailing the final purchase price, the specific amount of any gift of equity, and a clear closing timeline to prevent future misunderstandings with the IRS or other family members. Once the contract is signed, the final stage involves clearing the title and officially transferring the deed. You will work with a title company to perform a comprehensive search, ensuring the home is free from old family debts, unknown liens, or boundary disputes that could threaten your ownership. On closing day, you will sign the final loan documents and the deed, which the title company then records with the county. To complete the process, you must update local tax and legal records, notify your insurance provider, and ensure your parents have the necessary documentation for their tax filings.

Pros and cons of buying your parents house

Here are the advantages and disadvantages of buying a home from your parents.

Feature	Pros	Cons
Down payment	Gift of equity may cover all or part of the down payment.	If the home’s appraised value is too low, lenders may require you to pay a cash down payment.
Closing costs	Save money by skipping real estate agent commissions.	You still owe title fees, taxes, and recording costs.
Tax basis	Lock in today’s price to start building equity now.	Lose step-up in basis for capital gains.
IRS reporting	No actual tax owed for gifts under $15M lifetime.	Must file Form 709 for gifts over $19k/person.
Future care	Parents liquidate equity to fund their retirement.	Medicaid look-back penalties possible.
Home quality	Direct knowledge of all past repairs and “quirks.”	No “arm’s length” protection if a major defect is missed.
Family ties	Keeps the family home in trusted hands for decades.	Disputes may arise if heirs feel the sale price was unfair.

 

Is buying your parents’ house the right move?

Buying a home from your parents can make sense if you’re trying to minimize upfront costs, avoid market competition, or keep a property in the family. A gift of equity can reduce the cash needed to buy, and you may already feel confident about the home’s condition.

That said, there are tradeoffs to consider. Purchasing now means giving up the potential tax advantages of inheriting the home later, and family sales come with added lender scrutiny and documentation requirements. There’s also the emotional side: even with the best intentions, disagreements can arise if other heirs feel the terms weren’t fair.

For many families, the deal works best when it’s treated like a standard transaction on paper—even if it doesn’t feel that way emotionally. Getting professional guidance can help preserve both financial clarity and family relationships.

The post How to Buy Your Parents’ House: Steps, Tax Rules, and Gifts of Equity appeared first on Redfin | Real Estate Tips for Home Buying, Selling & More.

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