Gift of Equity
Candlefocus EditorThe buyer should be able to document the reduced amount that is being charged for the house, which is the gift of equity. The parent or family member that’s gifting this equity to the buyer should be able to provide documentation showing the market value of the home and indicating that the buyer is only receiving the reduced amount at no cost.
Most lenders allow the gift to count as or towards a down payment on the home. The buyer isn’t required to pay interest or money on the gift of equity; it’s an act of generosity. Gifts of equity must be properly documented through a gift of equity letter, and the homebuyer must be able to qualify for a mortgage.
Gifts of equity also provide a way for people to transfer appreciated assets with little or no tax consequences. The giver of the gift of equity is responsible for paying any capital gains taxes. On the other hand, the recipient of the gift isn’t responsible for any capital gains unless they make a later sale of the home. The gift giver and recipient should always consult with a financial planner or tax professional to ensure they understand the tax implications of the transaction.
Gifts of equity reduce the amount of money that is needed to purchase a house. It's a fairly easy way to transfer wealth between family members and can be a great way to help out a first time homebuyer. This type of transaction should always be documented properly and legal advice may be necessary depending on the circumstances. However, a gift of equity can provide a great benefit to both the giver and recipient of the gift.