How to Give Equity as a Gift

Giving a gift of equity is a good way to help a family member afford a home. To give a gift of equity, you sell a family member your home for the appraised value. They obtain as much financing as they can and you give them the remainder of the purchase price as a gift.

For example, you may sell your home to your son for $200,000. You son obtains a mortgage for $150,000, and you give him an equity gift of $50,000. You should be aware that there may be tax consequences for you in giving a gift of equity, and the lender may also have certain requirements.

Set the sales price of your home at or close to the appraised value. Many lenders will not lend money to someone who is buying a property at a price that's substantially above or below the appraised value.

Discuss with the buyer's lender what requirements it has for a down payment where a gift of equity is involved. For example, if the loan is backed by Fannie Mae or Freddie Mac, the buyer may have to pay a 5 percent down payment from his own funds, in addition to the gift equity. The Federal Housing Administration allows gift equity to be used for the entire down payment amount. Individual lenders may have their own rules.

Agree on the amount of gift equity you will be giving. The buyer should first find out from her lender how much she can borrow. The difference between that amount and the price of your home will be the gift equity.

Contact your accountant to discuss whether you will need to pay federal gift tax on your gift. Only the giver pays gift tax; the recipient receives gifts tax-free. In general, you can give up to $15,000 per recipient, as of 2019, before needing to pay gift tax. A married couple can give $15,000 each to each recipient. For example, you and your wife can each give $15,000 to your son.

However, there is also a lifetime exemption. As of 2019, this is $11.4 million. This means you can give up to this amount in total gifts during your lifetime without paying gift tax. These rules can change, depending on your financial circumstances and changes to the tax laws, and it is best to check with a tax professional before making any large gifts.

Prepare a gift letter, setting out the source of the money being used for the gift, the relationship between the giver and recipient and contact information for giver and recipient. The lender and the Internal Revenue Service will require this letter. Keep in mind that government and private lenders will generally only allow use of gift equity when the seller is a direct relative of the buyer or is a domestic or financial partner.

Report the gift on IRS Form 709 if the gift was larger than $15,000. Reporting the gift does not mean you owe gift tax; you'll only owe gift tax if you exceed your lifetime gift limit.