Gift Of Equity

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.


  1. Great post. We’re in the middle of doing this exact same thing. My mother-in-law is gifting us a value of about $27,000 which we will use as the down payment and avoid PMI. To get around the gift tax and IRS form 709, we had her sign a promissory note saying that she’s releasing the money to us in stages. So, we’re not really getting the gift all at once. Instead, we’ll spread it over two years and not have to file any special tax forms. I’m not really sure how it works, but we worked with a CPA to make sure that it was all legit.

  2. Actually, for 2009, the gift tax exclusion is up to $13,000. So in your example, only $13,000 of the $65,000 of equity would be considered a taxable gift, calculated as such:

    $65,000 equity split between the in-laws = $32,500 each. $32,500 – $13,000 to daughter – $13,000 to son-in-law = $6,500 taxable gift for each in-law, or $13,000 total.

    “The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, and $13,000 on or after January 1, 2009, the annual exclusion applies to each gift.”

    Per this link:,,id=108139,00.html

  3. @Kevin: Thanks – I had forgotten about the increase to $13k this year. I’m going to update the article with the corrected figure after giving you credit here.

  4. @Kristy: I’m not sure if the laws on gift of equity for down payment vary state to state, so do ask mortgage lenders in your area. It might also depend on the type of mortgage – FHA may have different requirements on down payment funding than say, a conventional mortgage.

    It does sound like an attractive way for parents to help their kids into a home without laying out cash (although, as you say, they will be giving up some equity).

  5. HI! I am going to buy my grandmother’s house. It is worth $170,000, I am paying $150,000. But she is going to hold the mortgage for 4 years, I wonder if I can still get this so when I get a bank mortgage I can avoid paying PMI. Should I ask my CPA or the IRS or a relator? Thanks!

  6. @Rebecca: PMI is typically not required as long as your loan does not exceed 80% of the value of the home. In the scenario you provided your borrowing about 88% of the value, but since your grandmother is holding the mortgage you may be able to avoid PMI, since that is more an institutional insurance requirement should you default on the loan. If you have a relationship with a CPA I would ask them, or a Realtor in your area should be able to provide more guidance.

  7. I am putting down $15,000 and then in 4 years I have to get my own mortgage, so then I would like to have 20% vseted in. $15,000 is only 10%, but if she gifts me the equity (about $15,000-$20,000.) Then I will not need the PMI. I will ask my CPA. I have to find out if she should gift me equity now or in 4 years. Thanks!

  8. I am getting divorced and I am buying the home from my husband. The house is worth about $155,000.00. I am buying it for $105,000.00. This is the outstanding line of credit loan. The house was never in my name (although we have been married for 12 years). So the mortgage company is asking for a ‘gift of equity’ letter. From what I’ve this sounds OK. BUT, my huge problem right now is the vaslue of the home on the divorce papers (MSA) is listed as $130K and the mortgage guy listed it as $140K (so I can put more down…?…) and the attorneys don’t like this discrepency. I think the mortgage man needs to change his numbers to match divorce paper value. No we didn’t get an appraisal.

  9. my father would like to gift me the equity in the house I’m going to purchase from him . would he have to pay tax on this gift of equity ?