Buying a Home From Your Parents: How to Do It, Tax Consequences and More
Buying a house from your parents might seem straightforward — after all, you already know the seller. But family home sales come with unexpected rules that can catch buyers off guard.
While purchasing the property is one way parents can transfer ownership to their children, it’s not always the simplest or most tax-efficient option. These transactions face stricter lending requirements, complex tax implications and mandatory documentation that standard purchases don’t require.
The good news? Understanding these requirements upfront helps you avoid costly surprises and choose the best path forward.
- You can buy your parents’ home using a traditional mortgage, but lenders will consider it a “non-arm’s length” transaction since it’s between family members.
- Non-arm’s length deals can trigger special down payment and documentation rules. In some cases, you may have to make a larger down payment.
- Family transactions can come with special tax implications, including potential gift or capital gains taxes for your parents.
How buying a home from your parents works
Step 1. Negotiate a fair price.
Research your parents’ home’s market value using a comparative market analysis, online estimators or home appraisal. Use this information as a starting point to agree on a price that works for both parties.
Step 2. Sign a purchase contract.
Draft a legally binding agreement that includes the price, property description, names of buyers and sellers, closing costs, what stays with the property and the closing date. If you’re working with a real estate agent, that’s traditionally their job. Or, you may choose to work with an escrow officer or real estate attorney who can ensure that the documentation is completed correctly.
Step 3. Document any gifts of equity.
If your parents are gifting part of their home equity toward your down payment, follow your lender’s specific requirements for conventional or FHA loans. Requirements vary based on loan type and whether the home was your parents’ primary residence.
Step 4. Apply for a mortgage (or arrange seller financing).
Inform your lender upfront that you’re buying from a relative because lenders consider a sale between family members differently (in the mortgage industry, this is known as a “non-arm’s length” transaction). If you can’t qualify for a traditional mortgage you may want to consider seller financing, which is where your parents lend you the money instead of a bank.
Step 5. Close on the sale.
Schedule a closing at a bank, title company or attorney’s office to finalize the sale. Review all closing documents to confirm terms, costs and prices are correct before signing.
Top 5 considerations when buying a home from your parents
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Can you afford to pay full market value for the home?
Many mortgage lenders require that the sales price for a transaction between family members be the same as if the deal were happening between strangers. Even if your parents want to give you a great deal, lenders may refuse to finance the purchase if the price is significantly below appraised value.
If you’re purchasing the home with cash and don’t need financing, you’ll have the extra freedom to purchase the home at any price.
-
A stricter down payment requirement may limit your loan options
The Federal Housing Administration (FHA) calls family sales “identity of interest” transactions. For this type of sale, an FHA loan borrower can’t exceed a maximum 85% loan-to-value (LTV) ratio, meaning buyers must make at least a 15% down payment. However, there are a few exceptions if:- The home was your parents’ primary residence and will be your primary residence
- You’ve been renting or living in the home for at least six months
Luckily, a parent can choose to gift a portion of the home’s equity toward their child’s down payment. No cash actually changes hands — the parents simply choose a dollar amount of the equity to give them as part of their down payment.
- Gifts of equity can trigger special down payment requirements
The rules for gifted funds — including gifts of equity — differ based on the loan type.
| Loan type | Minimum borrower contribution | Additional requirements |
|---|---|---|
| Conventional |
| Provide a gift letter |
| FHA |
| Provide a gift letter |
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Have you considered the tax implications?
- Capital gains tax considerations
If your parents sell you their home for more than they paid for it, capital gains taxes may come into play. Capital gains taxes are triggered when you sell a property for more than its adjusted cost basis. Cost basis is the original purchase price of an asset (plus any associated costs like fees or commissions) that’s used to calculate capital gains or losses for tax purposes when you sell the property. The cost basis can also be adjusted in some cases, making it more or less than the price you actually paid.
Example:
If your parents bought the home for $200,000, invested $50,000 in improvements, and then sell it to you for $400,000, their profit (capital gain) would be $150,000 ($400,000 – $250,000 = $150,000).
However, if the home is your parents’ primary residence, they may qualify for the capital gains tax exclusion, which in 2025 can reduce that taxable amount by $250,000 (or $500,000 for a couple filing taxes jointly). - Gift tax considerations
If your parents sell you their home for less than it’s worth, the IRS treats that discount as a gift known as a “gift of equity.” As the gift recipient, you don’t have to pay taxes on that money but your parents may have to file a gift tax form. For 2025, parents can give up to $19,000 per child ($38,000 if both parents are giving) without any paperwork. Above that amount, they’ll need to file a gift tax form — but they almost certainly won’t owe any actual tax unless they’ve given away over $13.99 million in their lifetime.
- Capital gains tax considerations
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Do you want to avoid the appraisal process?
Conventional loans generally allow non-arm’s length borrowers (family transactions) but home loans backed by Freddie Mac aren’t eligible for an appraisal waiver or hybrid appraisal — it has to be done in-person by a professional appraiser.
Pros and cons of buying a house from your parents
Pros
- You won’t have competition from other buyers.
- Your parents can choose to act as your lender if you can’t qualify for a mortgage.
- You can save money by avoiding real estate agent commission fees.
Cons
- You may face stricter requirements with a non-arm’s length transaction than you’d find with typical minimum mortgage requirements.
- Your parents could face a large tax burden due to capital gains taxes from the sale, or if they gift you funds or equity.
- You risk damaging family relationships if someone feels they were treated unfairly.
Alternative ways to receive property from your parents
Assume the mortgage
If your parents’ home still has a mortgage, you can take over that mortgage by assumption. This means stepping into your parents’ role as the mortgage borrower and homeowner, while the mortgage terms and loan balance stay the same.
Most government-backed mortgages are assumable, but most conventional loans aren’t. If you’re unsure, have your parents reach out to their lender for more information.
Gradual equity transfer
Your parents can strategically gift you portions of the home’s equity without triggering the gift tax. As long as they stay within the annual gift tax exclusion ($19,000 per parent, per recipient in 2025), you can slowly accrue equity tax-free. Over time, these equity portions could cumulatively add up to your ownership of the property.
Quitclaim deed
Your parents can transfer ownership to you via a quitclaim deed, which is simpler than a traditional sale. No money will have to exchange hands, and you won’t have to involve mortgage lenders, real estate agents or escrow officers. The deed simply transfers ownership from one party to another.
However, because the transfer isn’t a sale, as the new homeowner you’ll miss out on some of the protections that are built into the traditional process for buying and selling real estate. For that reason, you should do your homework and carefully research the title before taking ownership.
Selling the property and gifting proceeds
Your parents can sell the home, claim the primary residence capital gains exclusion (if eligible), and then gift the proceeds to you tax-free within the annual or lifetime gift limits.
The key point is that the gift must be less than the current annual gift tax exclusion (or their lifetime gift and estate tax exemption) without triggering immediate taxes.
Inheritance upon death
If you inherit the property after your parents die, rather than acquiring it now in a sale, the cost basis Cost basis is the original purchase price of an asset (plus any associated costs like fees or commissions) that’s used to calculate capital gains or losses for tax purposes when you sell the property. The cost basis can also be adjusted in some cases, making it more or less than the price you actually paid. resets to the home’s current market value at the time of their death. This minimizes or eliminates capital gains taxes if you sell the property later.
Living trust
Your parents can place the property in a living trust with you as the beneficiary. Upon their death, ownership transfers to you without going through probate.
Frequently asked questions
Yes, as long as you and your parents understand how it works. It removes the need for the exchange of any cash — the seller won’t need to provide money for gift funds and the buyer won’t need to document the transfer of cash to their account.
If you’re gifting a large chunk of equity to your child, consult a tax specialist to determine if you’ll need to pay any gift taxes.
Yes. Your parents can choose a sales price, but may have to contend with potential tax consequences since the IRS could treat the difference between the home’s value and sales price as a gift.
An estate attorney would be the best person to help answer that question. There are a number of factors to consider, including whether the property is your parents’ primary residence, how long your parents live after the sale and whether they sell the home below market value.
Yes, but you should discuss potential tax consequences with an estate tax specialist first.
No, unless they have an assumable mortgage.
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