Have you ever considered purchasing a home from a family member? If so, did you know you may be able to use the equity in their home as a down payment, and to cover closing costs? Well, I didn’t know such an option was available. It is called giving a gift of equity, and it basically means the seller gifts the equity in their home to the buyer to serve as their down payment.
A Real World Example
A friend of mine is considering the purchase of his in-laws’ house. The house appraised for $205,000, and they owe roughly $150,000. His in-laws are looking to relocate for retirement, so if they can sell the house to their daughter and son-in-law without having to market the home, and gift the equity to their kids, everybody wins.
My buddy’s in-laws have graciously agreed to sell them the house for what they owe, and gift the equity in the home to him and his wife. While they can easily afford the mortgage, they don’t have a pile of money sitting around to come up with down payment required by their lender.
Gift of Equity Letter Requirements
If you decide to go this route, you’ll need the seller to sign a Gift of Equity letter stating the following:
- Name of the donor
- Name of the recipient
- Relationship (son, mother, sister, etc.)
- Address of the property
- Assessed market value of the property
- Gift amount
The letter will also need to have some language explicitly stating the gift of equity is just that – a gift. There is no obligation or expectation of repayment. Contact your lender, as most have a standard form or Gift of Equity Letter available in a format they prefer.
Tax Issues Associated With A Gift of Equity
Tax issues are of little concern if you receive a gift of equity. However, if you are on the giving end of a gift equity, there may be tax consequences to consider related to gift taxes in general.
As it stands, anyone can give up to $13,000 per year to another individual. If the gift of equity exceeds that amount then a gift tax may be reportable (that doesn’t necessarily mean you have to pay taxes on that money, but you will likely have to file IRS Form 709 to report the gift).
Even if you have to file Form 709 (IRS website) the amount of the gift of equity exceeding $13,000 per individual involved in the transaction will simply be deducted from the million dollar exclusion for which most of us are eligible. It is probably not a deal breaker, but when discussing a gift of equity it makes sense to discuss the deal with a CPA or tax professional, particularly one familiar with real estate deals.