Gift of Equity Calculator

Understanding Gift of Equity

What is a Gift of Equity?

A gift of equity occurs when a property is sold for less than its fair market value, with the difference serving as a gift to the buyer. This is commonly used in family property transfers, where parents sell a home to their children at a below-market price.

How Gift of Equity Works

• Property Appraisal: The property must be professionally appraised to establish fair market value
• Gift Calculation: The gift amount equals the market value minus the sale price
• Down Payment: The gift of equity can count toward the buyer's down payment requirement
• Lender Approval: Most lenders allow gift of equity but require proper documentation

Tax Implications

Annual Gift Tax Exclusion (2024)

Each person can gift up to $18,000 per recipient per year without filing a gift tax return. For married couples, this means $36,000 total ($18,000 from each spouse).

Lifetime Gift Tax Exemption

Gifts exceeding the annual exclusion reduce your lifetime gift tax exemption ($13.61 million in 2024). Most people won't exceed this lifetime limit.

Gift Tax Return (Form 709)

Required when gifts exceed the annual exclusion amount, even if no tax is owed due to the lifetime exemption.

Benefits of Gift of Equity

✓ Reduces Down Payment: Buyer may not need to bring as much cash to closing
✓ Avoids PMI: Can help buyer reach 20% equity to avoid private mortgage insurance
✓ Better Loan Terms: Higher equity may qualify buyer for better interest rates
✓ Keeps Property in Family: Facilitates intergenerational wealth transfer

Requirements and Documentation

📋 Professional Appraisal: Required to establish fair market value
📋 Gift Letter: Signed statement documenting the gift from seller to buyer
📋 Purchase Agreement: Must specify the sale price and gift of equity amount
📋 Lender Documentation: Follow lender's specific requirements for gift of equity
📋 IRS Form 709: File if gift exceeds annual exclusion amount

Important Considerations

Family Relationship Required

Most lenders require a family relationship between seller and buyer. Acceptable relationships typically include parents, children, siblings, grandparents, and sometimes other close relatives.

Arm's Length Transaction

Despite the family relationship, the transaction must still meet certain standards. The property must be appraised, and proper documentation must be maintained.

Impact on Seller's Proceeds

The seller receives less cash from the sale due to the below-market price. Ensure the seller can still pay off their existing mortgage and any associated costs.

Potential Complications

If the buyer defaults on the loan, family relationships can be strained. Consider all parties' financial situations carefully before proceeding with a gift of equity arrangement.

Gift Analysis