What is a gift of equity and how does it work?

Key Takeaways A gift of equity is when the difference between the appraised value and the agreed sale price is credited in the transaction and can be used toward the buyer’s down payment and closing costs.

This process generally requires an appraisal and requires the seller to provide a signed gift of equity letter, but specific rules and limitations vary by loan program.

While there are some tax forms involved, in most cases, a gift of equity will not result in either the buyer or seller having to pay additional taxes, though it can have implications for the buyer’s tax basis and potential capital gains on a future sale.

Families can use a gift of equity to help the next generation achieve their dream of homeownership, while also keeping their cherished homes in the family.

This strategy, in which the seller transfers part of the home’s value to the buyer by reducing the purchase price below market value, can help cover a cash-strapped buyer’s down payment.

Learn how a gift of equity works mechanically, what the tax implications are for both the buyer and the seller, and the paperwork requirements to decide if it’s the right option for you.

What is a gift of equity? A gift of equity is when a home seller transfers part of their equity to the buyer by agreeing to sell the property for less than its appraised value.

This structure can be useful when a family wants to pass a home to the next generation but the buyer can’t afford full market price.

The formula is simple: appraised value minus agreed sale price equals the gift amount.

No cash changes hands for the gifted portion, and the lender treats the difference as equity the buyer owns from the moment the deal closes.

For conventional loans, gift-of-equity transactions are permitted on principal residences and second home purchase transactions.

Investment properties are not eligible.

Other loan programs have their own rules, but one commonality they share is that the gift cannot require repayment.

Compare the available mortgage rates in your area How a gift of equity works The process for selling a home with a gift of equity usually requires these basic steps.