What Is A Gift Of Equity?
A gift of equity allows home sellers to transfer part of their equity to buyers, helping with down payments and closing costs, and can be a useful strategy for families passing homes to the next generation
A gift of equity is a process where a home seller transfers part of their equity to the buyer by selling the property for less than its appraised value. This can be used towards the buyer's down payment and closing costs. The process generally requires an appraisal and a signed gift of equity letter from the seller.
The formula for calculating the gift amount is simple: appraised value minus agreed sale price equals the gift amount. For example, if a home is appraised at $200,000 and the seller agrees to sell it for $180,000, the gift amount would be $20,000.
A gift of equity will not result in additional taxes for the buyer or seller in most cases, but it can have implications for the buyer's tax basis and potential capital gains on a future sale. The gift of equity cannot require repayment, and it is treated 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, but not on investment properties. The process of selling a home with a gift of equity usually requires an independent professional appraisal to establish the fair market value of the home.
## Why it matters A gift of equity can be a useful strategy for families who want to pass a home to the next generation but the buyer cannot afford the full market price. It allows the seller to transfer part of the home's value to the buyer, helping to cover the down payment and closing costs. This can be especially helpful for cash-strapped buyers who may not have enough savings for a down payment.
## What happens next To use a gift of equity, the seller and buyer must follow the required process, which includes getting an appraisal and signing a gift of equity letter. The lender will also need to approve the transaction and ensure that it meets the requirements for a gift of equity. Once the transaction is complete, the buyer will own the property and the seller will have transferred part of their equity to the buyer.
