Gift of Equity: Is it Worthwhile for the Buyer and the Seller?

A well-established way to give a financial leg up to a loved one, a gift of equity involves selling something quite substantial to that loved one at a price that is well below recognized market value. Read on for answers to some of the most commonly asked questions about gifts of equity that involve property transactions.

What is a gift of equity in real estate?

Gifts of equity are frequently associated with real estate transactions. The first step toward making a gift of equity for a loved one is getting an accurate appraisal of the home or other property that will change hands. With this appraisal in hand, you are then ready to bestow your equity gift by determining a specific sale price that falls below the property’s appraised value. If you want to calculate the monetary value of your gift of equity in its entirety, you need simply subtract your sale price from the appraisal amount.

Is a gift of equity a good idea?

As long as the seller can afford it, a real estate gift of equity generally provides a win-win situation for buyer and seller alike. The buyer gets an opportunity to own property with a significantly reduced down payment, while the seller gets to give something meaningful to a loved one. Even better, the typical gift of equity will generally insulate both the buyer and the seller from immediate negative tax implications.

Who can give a gift of equity?

In general, gifts of equity take place between parents and their children or grandparents and their grandchildren. But most conventional lenders also extend gift of equity eligibility to married spouses and domestic partners as well as individuals who are engaged to be married. Gifts of equity are also widely open to all types of blood relatives as well as the legal guardians of children even if they are unrelated by blood. Certain lenders, such as the federal government enterprises Fannie Mae and Freddie Mac, allow gifts of equity for an even wider range of candidates.

How do you ensure the legal validity of your gift of equity?

Different states and legal jurisdictions in the United States have different regulations when it comes to making sure that your gift of equity is recognized as authentic and valid. Beyond your standard real estate sales agreement (which should clearly stipulate all final property sales amounts), you should draft and sign a document that clearly acknowledges that the equity provided is a free and intentional gift.

While the requirement for official notarization on these sales documents might vary from place to place and situation to situation, most experts recommend seeking out a notary public to authenticate all documents that relate to your gift of equity. You simply cannot beat the high level of legal verification that a notarized document provides.

For more information about the value of the right documents and the power of the real estate notary, contact a representative of First Class Signing Service today.

Frequently Asked Questions (FAQs)

Q: What is an example of a gift of equity?

A: The classic example of a gift of equity occurs between parents and their children. If an aging couple wants to downsize into a smaller residence, they might choose to sell their existing home to their child using a gift of equity. If that home is worth $500,000 and they sell it to their child for $400,000, they have bestowed a gift of equity worth $100,000.

Q: What are the tax implications of a gift of equity?

A: Like all permissible gifts, gifts of equity carry no tax implications for those who receive them. However, those who give them may need to pay one or more tax penalties on their gifts if they exceed maximum gift limits. According to 2024 IRS tax regulations, any individual seller in a gift of equity transaction can give as much as $18,000 per year without facing taxation. This means that a married couple can give as much as $36,000 per year without filing a gift return. Sellers may also face capital gains taxes for selling properties at less than their original purchase price adjusted for inflation. However, they can avoid these taxes if the monetary value of their gifts falls below relevant exclusion limits, and they meet specific ownership and residency prerequisites.

Q: How does the gift of equity affect the seller?

A: Beyond its various tax implications, a gift of equity can impact the seller in a variety of ways. First and foremost, they will be selling their gift of equity property at below market value, which means they will receive less money than they would otherwise receive from the transaction. However, sellers typically establish a gift of equity to get something far more valuable than money: the peace of mind and sheer happiness that come with giving a beloved family member the financial assistance they need to own a home or another valuable asset that would otherwise be out of reach. Because they rarely involve negotiations and generally require less paperwork, gift of equity transactions also tend to be considerably simpler and faster than the typical property sales transaction.

Q: What are Freddie Mac’s guidelines for a gift of equity?

A: As one of the major mortgage backers in the United States, Freddie Mac regularly deals with gift of equity transactions on real estate properties. Freddie Mac only allows gifts of equity between individuals who share close family relationships: parents, grandparents, children, grandchildren and siblings. In many cases, aunts, uncles, and cousins are also eligible for gifts of equity. Freddie Mac permits gifts of equity to serve as a funding source for down payments and closing costs. If the gift of equity covers the down payment in its entirety, recipients typically face no minimum borrower contribution requirements.

Q: Does a gift of equity reduce sales price?

A: By its very definition and purpose, a gift of equity results in a lower sales price for the property involved. After all, any homeowner who pursues a gift of equity does so to give a family member the opportunity to buy that property at a price that falls below current market value.

Q: Does Fannie Mae allow a gift of equity?

A: Like Freddie Mac, Fannie Mae allows gift of equity transactions for individuals who meet certain requirements and follow certain guidelines. While these requirements and guidelines are quite similar, certain differences exist. For example, Freddie Mac generally permits gifts of equity for investment properties, while Fannie Mae generally restricts gifts of equity to primary and secondary residences.

Q: What are the pros and cons of a gift of equity?

A: In a gift of equity, sellers significantly reduce the final sales price of their property. Furthermore, they may have to pay gift taxes if they exceed maximum gift restrictions. However, these disadvantages are generally accepted or easily navigated by those who pursue gifts of equity. In addition to helping loved ones realize the dream of homeownership, gifts of equity can reduce or eliminate initial buyer down payments and final homebuying tax burden. It can also eliminate the need for private mortgage insurance.