The Gift of Equity: A Smart Way to Transfer Real Estate to Family Members

By Chika


Last Updated: February 10, 2023


If someone in your family is looking for a new home, there are a few things you can do to help.

One option is to give them cash that they can use for a down payment. You could also sell them your own home and give a gift of equity.

In this article, we drill down on what gift of equity is, and how it works. 



What is a Gift of Equity?

When someone buys a home or other property for less than what it is worth, they are giving away equity (gift of equity).

The equity gift is the difference between the home’s value and its sales price.

A gift of equity is a way for people to give their children or other family members real estate to meet lender requirements. This is even if they don't have enough money for a down payment or the higher monthly payment that would come with a home sold at market value.

However, some lenders or mortgage types may let close friends and family give gifts of equity. The difference between what the buyer pays for the property and what the property is worth on the market right now is the equity.

When you get a mortgage for the property, this equity is often applied to your down payment and closing costs. You may still need to put more money down on your mortgage to meet the minimum down payment or to avoid having to pay private mortgage insurance (PMI).



How a Gift of Equity Works

Let's say your grandmother wants to sell her house and move into an apartment.

The house is paid off and worth $400,000 on the market. Your grandmother wants to keep the house in the family and help you out by selling it to you for $300,000. That means she's giving you a $100,000 gift of equity, which is much more than the 20% down payment you'll need to avoid PMI.

The current market value of a home is usually based on its:

  • location
  • age
  • supply and demand in the local housing market
  • exterior and interior features
  • how it compares to other homes in the area

As is usual when buying a home, you'll need to get an appraisal to find out what the home is worth on the market. 

The seller will use this information to decide on the price, and your lender will use it to decide if the loan amount is right for the home. The difference between the appraised value and the selling price is the gift of equity you receive. Most lenders will put this toward the down payment and closing costs.

The price you have to pay is completely up to the seller. For example, they might decide to charge you 20% less than the appraised value. This would cover your down payment and keep you from having to pay for PMI.



Steps Needed to Complete a Gift of Equity

The requirements needed to close a gift of equity are fairly easy when compared to the paperwork requirements involved in buying a home.


Steps for the seller

A gift of equity sale needs a gift letter signed by the seller.

This letter says how much equity the sellers are giving away and gives the address of the property. The letter also describes the relationship between the owners and the buyers. It must say that the equity is a gift that the buyers don't have to pay back.

Sellers must also hire an appraiser to find out the current value of the house. This helps to figure out how much equity they are actually giving.


Steps for the buyer

Even if the borrower is getting a gift of equity, they will usually have to follow the usual steps for buying a home.

If the gift of equity doesn't cover the full cost of the home—for example, if the owners are selling a home worth $400,000 for only $300,000—buyers will still need to get a mortgage. This means that a mortgage lender will look at their credit and confirm how much money they make.

To help lenders do this, buyers will need to give them:

  • copies of their last two paycheck stubs
  • tax returns from the last two years
  • bank statements from the last two months
  • W-2 forms from the last two years

They'll also have to give lenders permission to check their credit reports and credit scores.


Mortgage options for a gift of equity

Even if the sellers are giving the buyer a big chunk of equity, the buyer still needs to apply for a mortgage loan.

There are many options for this. They can choose from all kinds of home loans, like:

  • 15-year
  • 30-year
  • adjustable-rate
  • Department of Veterans Affairs (VA) loans
  • Federal Housing Administration (FHA) loans

You can also use a gift of equity to buy a second home.



Tax considerations

The Internal Revenue Service (IRS) stipulates that a person can give any other person up to $17,000 in cash or property (in the case of a gift of equity) in a single year without having to file gift taxes.

So, a married couple could give their child a total of $34,000 in equity, or $17,000 from each parent, without having to pay gift taxes.

It is important to know that the gift tax is triggered for each recipient. This means that a couple could give each of their children a gift of equity worth $17,000 and each of their children's spouses or partners another $17,000. 

In this way, the couple could give away a total of $68,000 worth of equity without having to pay taxes on it.

If the owners sell a home worth $200,000 for $150,000, their gift would only be $50,000, and they might not have to pay a gift tax penalty.

If a seller gives away more than that amount of equity, they may have to pay taxes on it. The amount of the gift affects the tax rate.  



5 Benefits of a Gift of Equity 

Accessible homeownership

People can buy a home for less than what it's worth on the market.

Most lenders let buyers use this gift as their down payment, so they don't have to worry about coming up with enough cash. This makes it cheaper and easier to buy a home.

Cost-effective way of gifting

Sellers can give gifts to buyers without having to take money out of their own pockets.

Tax exemption

Buyers don’t have to pay taxes on a gift of equity, provided they are under the IRS stipulations outlined earlier. 

Buyer can save on upfront costs and PMI

If the gift of equity is large enough, buyers might not have to pay PMI.

This is different from buying through a mortgage where buyers are expected to pay PMI if they don’t come up with a down payment of at least 20% of the home’s purchase price.

Keeps property in the family

A gift of equity is a way to keep real estate within the family. This method of transferring wealth ultimately increases the family net worth long term.



4 Downsides of a Gift of Equity

Sellers may lose out financially

Sellers are forgoing a chance to make a huge profit on their sale if they decide to do a gift of equity.


If sellers gift too much equity, they’ll be hit with a gift tax. Also, if you buy a property with a gift of equity, you may have to pay more in capital gains taxes. Because the gift lowers the cost basis, you may have to pay more taxes if you make a lot of money when you sell the home.

Restrictions on eligibility

There are specific relationships and property types under which a lender would approve a gift of equity between the buyer and seller 

Need to pay legal fees

You might not have to pay real estate commissions, but you will have to pay a lawyer to help you with this deal.



The Bottom Line

A gift of equity is a way for owners to help family members purchase a home without them having to come up with a large cash gift.

It allows people to transfer wealth to their children or relatives by keeping property or real estate within the family. 

However, it has to be done in such a way whereby the beneficiary would not incur taxes or be required to pay private mortgage. If you follow the rules – writing a gift of equity letter, paying taxes when needed and paying for an appraisal – you’ll find that the process isn’t nearly as complex as you might think.

Photo by Kim Stiver


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