:max_bytes(150000):strip_icc()/GettyImages-1152308645-30340671b9504a20aa89be7ef5fec93a.jpg)
Andrew Ancheta is a finance editor who has reported extensively on cryptocurrency, NFTs, economics, and history. He previously worked as an editor for China Daily.
Updated November 21, 2023 Reviewed by Reviewed by Somer AndersonSomer G. Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years. Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas.
Fact checked by Fact checked by Jared EckerJared Ecker is a researcher and fact-checker. He possesses over a decade of experience in the Nuclear and National Defense sectors resolving issues on platforms as varied as stealth bombers to UAVs. He holds an A.A.S. in Aviation Maintenance Technology, a B.A. in History, and a M.S. in Environmental Policy & Management.
Part of the Series Guide to Selling Your HomeGetting Ready to Sell
Real Estate Agents
The Owner-Seller Option
The Selling Process
A gift of equity is the sale of a residence to a family member or someone with whom the seller has a close relationship. The price is below market value, as determined by a professional appraisal. The difference between the actual sales price and the market value of the home is the gift of equity. Most lenders allow the equity to be used toward a down payment.
Home equity is the value of a property minus any outstanding debts secured by that home. Giving a gift of equity means giving someone value in a home. A homeowner typically sells it to someone else for less than its true market price. The transfer counts as a gift because of the difference in value, even if there are no payments from one party to the other.
For example, if you own a home worth $300,000 and sell it to a family member for $200,000, they’ve received a gift of equity of $100,000. A gift of equity can occur if a home is given away for no compensation or if a discount is offered on its value.
Common gifts of equity are between parents selling their home and a child. However, these gifts can involve other family members, such as grandparents, aunts and uncles, cousins, siblings, or a child gifting to a parent. Most lenders allow the gift to count toward a down payment on the home. The residence that’s changing hands can be a primary residence or a second home.
Gifts of equity help the buyer reduce or eliminate down payment requirements, making it easier to secure a mortgage.
Buyers must still qualify for a mortgage even with a gift of equity. This means that they’ll need to meet the lender’s requirements regarding credit scores and income. They’ll also need to have the necessary documentation to get approved for a mortgage:
Sellers also need to consider what they’re walking away from with a gift of equity. They may be helping a relative to purchase a home who might be unable to otherwise. However, the seller could lose an opportunity to reap a sizable profit from the home’s sale.
You can use a gift of equity or gift funds for different types of mortgages, including conventional home loans or adjustable-rate mortgages, as well as Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs loans.
The most obvious benefit of using a gift of equity is that the buyer doesn't have to secure a down payment. That's because the gift of equity can be used as a down payment. This saves the recipient time and money, especially considering the minimum down payment for an FHA mortgage is 3.5%. Here's a further list of the benefits of a gift of equity:
There are disadvantages to gifts of equity:
A gift of equity requires a gift of equity letter, which is a letter stating the facts of the sale, signed by the seller and the buyer. The letter must note who is offering the gift, the amount of the gift of equity, and the property in question. It must also attest that it is, in fact, a gift, not a loan.
Here are other items that must be included in the letter:
At closing, a second letter will note the gift of equity. It’s up to the person making the gift to decide how much equity to give. For example, suppose you sell your home to one of your adult children. The home is appraised at $400,000, but you agree to sell it for $200,000, giving them a $200,000 gift of equity. That sale price is up to you.
A gift of equity can help the new owner avoid the expense of private mortgage insurance.
A lender usually considers gifts of equity as part of the down payment required to qualify for a mortgage. For example, suppose a bank requires 20% down, which is standard if you want to avoid mortgage insurance. If the gift of equity made by the seller equals 10% of the home’s value, the buyer now only needs to make a down payment of 10% of the property’s price.
Here's a fuller scenario to illustrate these points:
Suppose that you want to buy a home from a family member. The home's fair market value is $600,000, which means that a 20% down payment is $120,000. If your family member sells the home to you for $550,000, giving you a $50,000 gift of equity, you would only need $70,000 (about 11.7%) to cover the 20% down payment.
The amount required for the down payment is based on the kind of mortgage. For example, for an FHA loan, a gift of equity is allowed from a family member to cover a minimum 3.5% down payment, as long as the home is the primary residence.
A gift of equity involves transferring part of a home's value as a gift, while a cash gift is a direct transfer of money. Both can help a loved one purchase a home, but a gift of equity is specific to real estate transactions, eliminating the need for a cash transfer for the down payment or dealing with a third party in the sale of a property.
Yes, a gift of equity can be a part of estate planning. It permits homeowners to transfer property to family members or other loved ones while still alive, potentially reducing future estate taxes. This could help ensure that the property remains within the family.
Gifts of equity could have tax implications for the seller, depending on the size of the gift. The seller may have to pay a gift tax unless the gift of equity is lower than the annual exclusion. For 2024, that exclusion is $18,000 for single individuals and $36,000 for married couples.
Yes. For the giver, it can have tax implications. The amount of equity gifted can count against the annual gift tax exclusion or the giver’s lifetime gift tax exemption. A gift of equity is not directly taxable for the recipient but could incur higher capital gains taxes later on. This is because the gift of equity reduces the buyer’s cost basis, increasing the likelihood that they will earn a profit (the future sale price minus the cost basis) if they sell the property. All parties in a gift of equity should consult with a tax professional to understand any potential tax liabilities.
A gift of equity is a way for a seller to help buyers, usually family members, purchase a home. The seller doesn't give the buyers money as they would when giving cash for a down payment. Instead, they agree to sell their home below market value. This gives the buyer immediate access to more equity than they paid for.
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Description Part of the Series Guide to Selling Your HomeGetting Ready to Sell
Real Estate Agents
The Owner-Seller Option
The Selling Process
The subprime meltdown includes the economic and market fallout following the housing boom and bust from 2007 to 2009.
Seller-paid points are a form of discount offered on real estate paid by a property's seller that lowers the cost of a home purchase for a buyer.
A sublease is the renting of property by a tenant to a third party for a portion of the tenant’s existing lease contract.
In real estate, a short sale is an asking price for a home that is less than the amount that is due on its existing mortgage.
The gross income multiplier is obtained by dividing the property's sale price by its gross annual rental income, and is used in valuing commercial real estates, such as shopping centers and apartment complexes.
Other Real Estate Owned is a bank accounting term that refers to real estate owned by a bank that is not directly related to the bank’s business.
Related Articles
:max_bytes(150000):strip_icc()/worried-couple-reading-agreement-after-moving-to-new-home-964215820-27c7cbbf3f5f450295c32d64d8f43298.jpg)
:max_bytes(150000):strip_icc()/GettyImages-1429404033-31f17649b8ae45e7af8ccc6eaf089317.jpg)
:max_bytes(150000):strip_icc()/GettyImages-1081824440-2fcd29d1f0974847af9b6f57a3d2ba6d.jpg)
:max_bytes(150000):strip_icc()/Methodology-recirc-v13-da5a3e13175c467d85f3d29cf9f418c5.png)
:max_bytes(150000):strip_icc()/male-architect-drawing-improvements-on-housing-plan-at-construction-site--891274328-5acbae1318ba0100375f4920.jpg)
plan at construction site." width="400" height="300" />
We and our 100 partners store and/or access information on a device, such as unique IDs in cookies to process personal data. You may accept or manage your choices by clicking below, including your right to object where legitimate interest is used, or at any time in the privacy policy page. These choices will be signaled to our partners and will not affect browsing data.
Store and/or access information on a device. Use limited data to select advertising. Create profiles for personalised advertising. Use profiles to select personalised advertising. Create profiles to personalise content. Use profiles to select personalised content. Measure advertising performance. Measure content performance. Understand audiences through statistics or combinations of data from different sources. Develop and improve services. Use limited data to select content. List of Partners (vendors)
