What is a gift of equity and how does it work?
A gift of equity lets a seller transfer home equity to a buyer, covering a down payment and more. Here's how it works and what the tax rules require.
Gift of equity refers to the transfer of a portion of a property's equity from a seller to a buyer in a real estate transaction. The seller agrees to sell the home for less than its appraised value, and this difference is considered a gift by the buyer. This arrangement can help buyers with lower incomes meet their down payment and closing costs requirements.
The process for executing a gift of equity typically involves an appraisal, a signed gift letter, and lender approval. The gift may help buyers avoid private mortgage insurance and reduce their overall tax liability. However, rules and limitations vary depending on the loan program. Families often use gift of equity transactions to pass on cherished family homes to future generations while keeping those homes within the family.
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