What Is a Gift of Equity?
A gift of equity occurs when a homeowner sells a property to a family member (or close relationship) for less than its appraised market value. The difference between the appraised value and the discounted sale price is "gifted" to the buyer as instant equity. Lenders often allow this gifted equity to count toward—or fully cover—the buyer's down payment, making it a popular tool for helping relatives buy a home.
How to Use This Calculator
Enter the home's appraised value, the agreed sale price, and any additional cash down payment the buyer is contributing. The calculator instantly returns the gift of equity, the buyer's required mortgage loan amount, and the gift expressed as a percentage of the appraised value.
The Formula Explained
The math is straightforward: $$\text{Gift of Equity} = \text{Appraised Value} - \text{Sale Price}$$. The buyer's mortgage is then $$\text{Loan Amount} = \text{Sale Price} - \text{Down Payment}$$. The gift percentage divides the gift by the appraised value, which helps confirm whether it satisfies a lender's minimum down-payment requirement.
$$\text{Equity \%} = \frac{\text{Appraised Value} - \text{Sale Price}}{\text{Appraised Value}} \times 100$$
Worked Example
Suppose a home appraises for $300,000 but a parent sells it to their child for $260,000, with no extra cash down. The gift of equity is $$\$300{,}000 - \$260{,}000 = \$40{,}000$$ The buyer's loan amount is $$\$260{,}000 - \$0 = \$260{,}000$$ and the gift equals \(13.33\%\) of the appraised value—often enough to satisfy a conventional loan's down-payment requirement.
FAQ
Is a gift of equity taxable? The gift may be subject to federal gift-tax reporting if it exceeds the annual exclusion, though tax is rarely owed thanks to the lifetime exemption. Consult a tax professional.
Can the gift cover the entire down payment? Yes—many lenders allow gifted equity to fully replace a cash down payment, but specific loan programs may set minimums. Check with your lender.
Do I need an appraisal? Yes. The gift of equity is based on a professional appraisal, so an official valuation is required to document the gifted amount.
