What is a 'Gift of Equity'

A gift of equity is the sale of a home made to a family member or someone with whom the seller has had a previous relationship, at a price below the current market value. The difference between the actual sales price and the market value of the home is called the gift of equity because the sales price is so much lower than the real market price of the home. Most lenders allow the gift to count as a down payment on the home.

BREAKING DOWN 'Gift of Equity'

A gift of equity requires a gift of equity letter that is signed by both the seller and the buyer. The seller must have an official, paid appraisal completed on their home, noting the appraised value of the home with the price they will be selling for, and recording the difference as the gift of equity on the official paperwork. There will need to be the gift equity paperwork, as well as a second settlement letter noting gift at closing.

A gift of equity can have tax consequences, as it could impact the asset's cost basis for the new homeowner and have capital gains implications for the seller. Additionally, a considerable sale can affect the local real estate market. If a house sells for considerably less than others with comparable features, it may negatively impact other home sales in that price point or area. However, it may be possible for the sale to be done privately or off-market to avoid that complication. The gifters must also follow IRS guidelines for gifts of monetary value, up to $28,000 per couple or $14,000 for an individual per year.

Example of a Gift of Equity

An example of a gift of equity may be a set of parents who wish to sell their home to their children at a price that they wish to name, rather than going through a real estate office that would demand a certain price for market purposes. The parents would name a price that they agreed on and “sell” the house to their children for that amount, despite the fact that the house is actually worth a lot more. Or, a gift of equity might occur if the individual or persons selling a home want to help the buyer complete the sale by essentially lowering the price of the home in order for the buyer to reach the down payment requirements. A lender can consider the gift of equity as the twenty percent, or other amount required, to complete the sale.

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