When Mom and Dad Buy the House in Their Own Names: Can an Intra-Family Mortgage Still Work?

 

By Timothy Burke, National Family Mortgage ®
For informational purposes only; not tax or legal advice.

 

Executive Summary

It is common for families to move quickly when a home purchase opportunity arises. In many cases, a real estate agent–focused on certainty of funds–prepares the offer and closes the transaction in the parents’ names because “Mom and Dad have the money.” The intent, however, is often very different. The parents do not want to own the home; they want to provide the financing, similar to situations where parents loan money to their children to buy a house.

Families in this situation are usually asking a simple question: if Mom and Dad already bought the house in their own names, can the home still be transferred to the child and financed with an intra-family mortgage?

When that intent is not clarified before closing, families understandably worry that they have missed their chance to structure a private family mortgage. In most cases, they have not. A properly documented family sale with seller financing can still work–but the mechanics, costs, and tax considerations change once the parents have already taken title.

In practice, families often move through this sequence: parent purchase, brief holding period, family sale, and long-term repayment under a documented promissory note.

 

Why This Happens So Often

This scenario usually arises from process, not planning.

Real estate purchase contracts can typically be structured so that the child is the purchaser and owner, while the parents provide funds as a loan secured by the property. When speed or competitive pressure is involved, however, offers are sometimes written in the parents’ names simply because they are the source of funds. That choice is often made without a discussion of long-term ownership, tax treatment, or family financing goals.

Before closing, it is frequently possible to amend the contract to reflect the intended structure. After closing, the family must instead rely on a subsequent transfer paired with seller financing, often formalizing the arrangement after the fact.

 

The Threshold Tax Question: Did Mom and Dad Sell at a Gain?

Once the parents own the home and later transfer it to their child, the transaction is analyzed as a sale for tax purposes and evaluated under the same principles used to distinguish a family loan from a gift, even when the arrangement feels informal within the family.

Sale at or Near Cost

If the parents sell the home to their child for approximately what they paid, adjusted for customary closing items, there is often little or no taxable gain. In that common scenario, the transaction is primarily about documentation, compliance, and administration rather than capital-gains planning.

Sale of an Appreciated Property

If the home appreciated between the parents’ purchase and the transfer to the child, capital-gains tax may apply. Families often ask whether seller financing allows that gain to be reported over time using the installment method. Sometimes it does. Sometimes it does not.

The answer depends largely on related-party rules and how the property will be used after the transfer.

 

Why Seller Financing Does Not Always Defer Tax in Family Transactions

Seller financing is frequently associated with installment-sale tax deferral. In related-party family transactions, that assumption can be incomplete.

Related-Party Rules That Commonly Apply

• IRC §453(e) may accelerate gain recognition if a related buyer resells the property within two years.

• IRC §453(g) can disallow installment reporting entirely when the property is depreciable in the hands of the buyer.

When §453(g) Becomes Critical

Section 453(g) is most relevant when the child will be able to depreciate the property after the transfer, such as when the property will be used as:

• a rental property,

• a vacation home that will be rented, or

• certain mixed-use arrangements.

If the child will be able to depreciate the property after the transfer, related-party rules may require the parents to recognize the full gain in the year of sale, even though payments are made over time.

For how income-producing ownership changes loan classification and tax analysis, see Intra-Family Mortgages and Income-Producing Residential Property: Ownership, Compliance, and Practical Limits.

Primary Residence Versus Rental Use

The distinction is often practical rather than conceptual:

• A primary residence used personally by the child is generally not depreciable, which may allow installment reporting if other requirements are satisfied.

• A depreciable property can trigger immediate gain recognition under related-party rules, regardless of the payment schedule.

Because these outcomes turn on use and intent, families typically coordinate closely with their tax professionals before finalizing the transfer.

 

The Financing Rule That Still Applies: AFR-Compliant Interest

Whether or not the parents recognize gain, a family promissory note used to finance the transfer should generally carry at least the Applicable Federal Rate (AFR) for the month of closing, matched to the loan’s term.

For the broader federal compliance framework families use to choose and document the applicable rate, see IRS AFR Compliance for Intra-Family Loans and Seller-Financed Home Sales.

Below-market interest on related-party loans can result in imputed interest and potential gift-tax consequences under federal tax rules. A clearly written note with an AFR-compliant rate, defined repayment terms, and a stated maturity is a core component of a compliant intra-family mortgage or family seller-financed transaction.

 

Practical Costs and Logistics Families Should Expect

Even when the transfer occurs at cost and no capital gain is recognized, families should expect some real-world friction once the parents have already closed in their own names.

Duplicated Closing and Recording Items

A subsequent transfer commonly requires:

• preparation and recording of a new deed,

• a new promissory note and mortgage-style security instrument, and

• recording fees and settlement services.

These costs are often unavoidable because the transaction is a separate conveyance under state law.

State and Local Transfer Taxes

Some jurisdictions impose real-estate transfer taxes even on at-cost family transfers. Whether an exemption applies is state-specific and should be confirmed with the settlement agent handling the transfer.

Title Insurance Considerations

If the parents obtained an owner’s title insurance policy when they purchased the property, there may be opportunities to transfer the policy, obtain a reissue credit, or receive a discounted premium–particularly when the transfer occurs shortly after the original closing. Families should confirm available options with their settlement agent or title company.

 

How Families Typically Formalize the Transfer

While state law governs the details, the objective is consistent: to clearly reflect that the child owns the home and repays the parents under a mortgage-style obligation.

Common elements include:

1. A deed transferring title from the parents to the child.

2. A written promissory note setting principal, interest rate, payment terms, and maturity.

3. A recorded mortgage, deed of trust, or security deed, as applicable by state

4. Consistent payment records and annual interest reporting aligned with the note.

What This Arrangement Is–and Is Not

• This is a forward-looking family sale with documented seller financing.

• This is not a retroactive recharacterization of the original purchase.

• This is not a gift unless structured or reported as one.

 

Frequently Asked Questions

Is it permissible for parents to buy first and transfer the home later?
Yes. Families do this frequently when timing or logistics require the parents to close. The key is documenting the subsequent transfer and financing clearly and consistently.

If Mom and Dad sell at cost, is capital-gains tax avoided?
Often, yes–because there is little or no gain to recognize. State transfer taxes and closing costs may still apply.

Can seller financing spread the tax over time?
Sometimes. Related-party rules can limit installment-sale treatment, particularly when the property is depreciable to the buyer.

Does a primary residence change the analysis?
It can. A primary residence is generally not depreciable, which may allow installment reporting if other requirements are met. Different rules apply if the property is rented.

Does the interest rate really matter if everyone agrees?
Yes. Federal rules governing related-party loans generally require adequate stated interest, commonly satisfied by using the AFR in effect for the month of closing.

Did we mess this up by letting Mom and Dad buy the house first?
No. This is common, and in most cases a family sale with seller financing can still be implemented going forward.

Can Mom and Dad just stay on title and have us “pay them back”?
From a tax and property-law perspective, ownership and financing are distinct. If the child is intended to own the home, a transfer of title paired with a documented loan is typically the clearer structure.

Are settlement agents and title companies still involved?
Typically, yes. Even family transfers are real estate transactions under state law, and coordination with a settlement agent helps address recording, taxes, and title insurance.

 

Conclusion

When parents buy a home in their own names because they have the funds, the situation is usually not fatal to the family’s original financing plan. An intra-family sale with seller financing can still be implemented, provided the transfer is documented carefully and the tax consequences are understood.

The analysis often turns on whether the parents sold at a gain and whether related-party rules affect installment-sale treatment–especially when the property will be depreciable to the child. Even when no gain is recognized, families should expect some duplication of closing costs, possible transfer taxes, and coordination with settlement professionals.

Clear documentation, AFR-compliant interest, and alignment between intent and execution remain central to making the arrangement workable and defensible.

 

Technical Appendix: Key Tax Concepts and Code Sections

AFR and adequate stated interest

• IRC §1274(d) establishes the Applicable Federal Rate framework.

• IRC §7872 addresses below-market loans and potential imputed interest and gift consequences.

Installment sales and related-party limitations

• IRC §453 governs installment sales generally.

• IRC §453(e) addresses related-party resales within two years.

• IRC §453(g) can require immediate gain recognition when property is depreciable to a related buyer.

Substance and documentation
Tax analysis in family transactions focuses on facts as well as form. Written documents, payment behavior, and reporting consistency all matter.

Families and their advisors should consult applicable statutes, regulations, and professional guidance when considering these principles in specific transactions.

 

About the Author

Timothy Burke is the founder of National Family Mortgage ®, an online company focused on helping families document and support compliant intra-family mortgage loans and seller-financed home transactions. His work focuses on proper documentation, alignment with applicable federal tax rules, and practical implementation considerations for families and their professional advisors navigating private family financing.

Families and their advisors should consult applicable statutes, regulations, case law, and professional guidance when applying these principles to specific transactions.

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