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What you’ll learn ✅
What a gift of equity is and how it works
Property and borrower requirements for making a gift of equity
Tax implications and pros and cons
Alternatives to gifts of equity
Homeownership has treated you well. For years, you’ve diligently made all your monthly payments, and your equity far outpaces your remaining mortgage balance. Now, you want to use that built-up equity to give a family member a leg up in becoming a homeowner. One way to do so is giving them a gift of equity, which involves selling them your home below fair market value so they get the difference as free equity.
Below, you’ll get the scoop on how gifts of equity work, their tax implications, and their pros and cons. Whether you want to give a gift of equity or you’re the lucky recipient, this info will help you determine whether this option is the right fit for your needs.
...in as little as 3 minutes – no credit impact
What’s a gift of equity?
Home equity is the difference between a home’s fair market value and how much the homeowner still has left on the mortgage. At first, equity might not sound like something you can give away. Borrowing against your equity with a home equity loan or a HELOC, sure, but giving it to someone else?
The solution is selling the home to the recipient below the fair market value, which is the approximate price the home would fetch in the open market. This way, the buyer can use the difference between the fair market value and the sale price toward their down payment and closing costs.
How does a gift of equity work?
Gifts of equity transactions most commonly take place between parents and their children, but other types of family relationships also qualify.
The first step in arranging a gift of equity is figuring out the property’s fair market value. In many cases, calling in a professional for an appraised value estimate does the trick. The rest of the deal functions in much the same way as any other real estate transaction.
Suppose you own a home with a market value of $500,000, and you want to pass it down to your child after downsizing to a smaller home yourself. You’ve completely paid off your lender (in other words, you have 100% equity).
If you set the sale price at $300,000, your child gets the difference between the sale price and the fair market value — $200,000 — in free equity. That leaves them with only $100,000 left to finance because:
Sales price − Gift of equity = $300,000 − $200,000 = $100,000
That’s a steep discount!
No cash changes hands during the process. Instead, lenders list the funds on the closing disclosure. They’ll outline how the gifted equity will impact the buyer’s final down payment and closing costs.
Eligibility requirements for gifts of equity
For a gift of equity, the property, buyer, and seller have to meet certain eligibility criteria, including:
Purpose: The recipient can put a gift of equity toward the down payment and closing costs. They can’t use it as part of their reserve funds.
Property type: Generally, the buyer must be purchasing the property as a primary residence or second home. Some types of mortgages have stricter requirements. FHA loans, for example, only allow gifts of equity for primary residences.
Relationship with the recipient: For standard conventional loans, you can usually give a gift of equity to a family member, fiancé, or domestic partner.
After checking eligibility requirements, each party is responsible for filling out certain documents:
Buyers must show financial records to prove they can afford the mortgage. This means paperwork like tax returns, bank statements, and investment account statements.
Sellers have to provide an equity gift letter, which outlines the gift’s size and states the seller doesn’t expect to be repaid. It also includes the seller’s contact info and relationship to the buyer.
Lenders must create a closing disclosure and settlement statement that lists the gift of equity.
Is a gift of equity taxable?
Gifts of equity have potential tax implications for both the buyer and the seller. If the gift comes out to more than $19,000 per person, the seller will have to report it on IRS Form 709. Any amount above that threshold gets applied to the seller’s lifetime gift exclusion. Luckily, the lifetime gift exclusion is $15 million in 2026, a number so high that most sellers will never have to pay a dime of taxes on gifts of equity.
For the buyer, a gift of equity may mean higher capital gains taxes if they end up selling the property down the road. That’s because profits are calculated using the seller’s original cost basis. Consider the example we used earlier. Even though the buyer got a great deal at $300,000, future capital gains tax might be based on the seller’s original purchase price. Let’s say that price was $200,000. That would mean the buyer has to pay taxes on any profits above $200,000 rather than the $300,000 they paid for the home.
The pros and cons of gifting equity in a home
Here are some of the primary advantages and potential disadvantages of gifts of equity.
Pros
Lower bar to homeownership: A gift of equity makes homeownership much more affordable.
No commission: Since the sale is between two family members, there’s no need to hire a real estate agent to scout properties or manage offers unless your state or lender requires one. That means no commission fees.
Contributes to the family legacy: If building generational wealth is one of your financial goals, keeping the home in the family is a good way to do it.
Cons
Less cash for the seller: Selling the home below its market value means the seller gives up some of their hard-earned equity.
Closing costs: Gifts of equity don’t eliminate closing costs. However, if the gift is large enough, it may cover them.
Gift taxes: While the seller probably won’t have to pay gift taxes unless they’re very wealthy, the recipient’s capital gains burden may be higher if they sell the home.
Alternatives to gifts of equity
If a gift of equity doesn’t quite fit the bill, there are other options that might:
Down payment assistance: Simply giving your family member cash is a viable option and may be less complicated.
Cosigning or co-borrowing: If the issue is that the buyer can’t qualify for good mortgage terms on their own, cosigning or co-borrowing can help.
Offering a loan: Providing the buyer with an interest-free loan yourself lets them save a huge amount on interest payments.
Whether you want to give a gift of equity or use one of these alternative methods, reach out to Better. The transfer will be a piece of cake from application to closing — with a killer interest rate thrown in for good measure. Apply in as little as three minutes without leaving your couch.
...in as little as 3 minutes – no credit impact
Find a simpler path to homeownership with Better
Gifts of equity let you give or receive the value built up in a home to make the homebuying process that much easier.
If you’re looking to give a gift of equity or a family member has offered you one, Better can make the transaction as smooth as butter. You can even partnering with a seasoned, hand-picked Better Real Estate Agent and save up to $2,000 in closing costs if you use Better Mortgage as well.
Get pre-approved today in as little as three minutes to see your personalized mortgage rate.
...in as little as 3 minutes – no credit impact
FAQ
Can a gift of equity be used for closing costs?
Yes, if the gift of equity is high enough, the recipient can generally use it to cover all or part of their closing costs.
Do I have to get an appraisal for a gift of equity?
Yes, your lender will likely require an appraisal to estimate the home’s fair market value.
What’s a gifted equity mortgage?
A gifted equity mortgage is just a home loan for a house purchased with the aid of a gift of equity. The buyer purchases the home from the seller at a price point lower than its market value, then uses the remaining equity for the down payment and closing costs.
What are the risks of a gift of equity?
The only potential risks specific to gifts of equity are the potential tax implications. If the gift is more than $19,000, the seller will have to report it on IRS Form 709. However, they only have to pay taxes on it if they exceed the $15 million (as of 2026) lifetime gift exclusion.
The buyer may have to pay higher capital gains taxes if they sell the home in the future. This is because the IRS might calculate their profits based on the seller’s original purchase price.