Gift of Equity: What It Is, How It Works, Taxes, and Pros & Cons

About Gift of Equity: 

A gift of equity is the sale of a residence to a family member or someone with whom the seller has a close relationship, at a price below the current market value as determined by a professional appraisal. The difference between the actual sales price and the market value of the home is the actual gift of equity. Most lenders allow the equity to be used toward a down payment.

  • A gift of equity involves the sale of a residence at a price below its current market value without the physical exchange of money.
  • A gift of equity usually involves family members, such as parents selling their home to a child.
  • Most lenders allow the gift to count as or toward a down payment on the home.
  • Gifts of equity must be properly documented through a gift of equity letter and the homebuyer must qualify for a mortgage.
  • Gifts of equity may have tax implications for both the giver and the recipient.

How a Gift of Equity Works?

Buying a home is a goal for many people. But it can be a daunting process, especially when it comes to the process of looking and saving for the purchase. But, there are certain strategies that individuals can use to help make things go a bit smoother.

Using what’s called a gift of equity allows people to effectively sell their homes to family members or others close to them without the exchange of cash. The concept comes from the fact that the sales price is much lower than the real market price of the home. The transfer counts as a gift due to the difference in value, even if no physical money changes hands.

A common gift of equity occurs when parents wish to sell their home to a child for a favorable price; however, it can also involve other family members, such as grandparents, aunts and uncles, cousins, or siblings. Most lenders allow the gift to count as, or toward, a down payment on the home. The residence that’s changing hands may be either a primary residence or a second home.


  • Lower or no down payment for the buyer
  • No need for physical cash to exchange hands between the giver and recipient
  • No real estate agent commissions


  • Doesn’t avoid closing costs
  • May trigger gift tax for the giver
  • Capital gains may be incurred because of impact on the property’s cost basis
  • Lower value could affect the local real estate market

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