Gift of Equity Loan

With the runup on home prices over the past decade, it can be difficult for first-time buyers to get into the housing market. A gift of equity might just be the perfect solution. Read below as we explain how this can work for you… 

​A gift of equity is when someone, generally a family member, sells a home to buyers at a price below fair market value. This provides first-time buyers or those with no down payment a way to purchase a home using a real estate gift from a donor.
 
Gift of Equity Example
Let’s say parents sell their child their home for $400,000 and it’s worth $500,000. The parents’ gift of equity would equal the difference between what they’re selling the home for and how much it’s really worth. In this case the gift of equity would be $100,000.
 
The $100,000 gift of equity can then be used as the child’s down payment in order to help eliminate mortgage insurance and lower the child’s borrowed loan amount.
 
Property Tax Considerations

• Most counties consider this a Parent-to-Child transfer, allowing the child to keep the original tax basis, reducing property taxes
• Keeping the basis requires the owners to complete the correct proposition form and the home to be the primary home for all involved

 
Capital Gains Considerations

• The property maintains its original owners’ basis, so this type of transaction can increase capital gains
• Whereas a transfer upon death receives a “step-up” in basis, limiting capital gains upon the new owner’s sale

 
Gift Tax Considerations

• The parent giving the gift of equity must file a gift tax return for any amount over the $16,000 “per person” annual exclusion (amount as of 2022)
• So in the above example, a gift tax return would be required to report the $100,000 gift and corresponding amount above the $16,000

 
Home Loan Considerations

• The gift of equity structure must be written into the purchase contact
• Lenders require a gift letter for the equity gift
• Gift of equity counts toward the down payment
• The home must appraise for the fair market value being used in order to receive full down payment credit

Contact us if you’d like to discuss specifics on a Gift of Equity situation you may have in mind.