# Gift of equity: transfer home value tax-smart > A gift of equity lets family members transfer home value below market price, covering down payments without cash changing hands. - Title: Gift of equity: transfer home value tax-smart · Fortune - Summary: A gift of equity lets family members transfer home value below market price, covering down payments without cash changing hands. A gift of equity is when a… - Keywords: gift of equity, home purchase, down payment, family real estate, mortgage, tax implications, appraisal, closing costs, private mortgage insurance, irs form 709, gift tax exclusion, tax basis - Source: Fortune — https://fortune.com/article/gift-of-equity - Author: Glen Luke Flanagan - Read time: 4 min - Topics: gift of equity, home purchase, down payment, family real estate, mortgage, tax implications, appraisal, closing costs, private mortgage insurance, irs form 709, gift tax exclusion, tax basis ## What is a gift of equity A gift of equity happens when a seller agrees to sell their home for less than its appraised value. The difference between the appraised price and the sale price becomes equity the buyer owns from day one, with no cash changing hands for that portion. ## The basic formula Appraised value minus agreed sale price equals the gift amount. For example, a home appraised at $400,000 sold for $320,000 creates an $80,000 gift of equity that the buyer can use toward their down payment and closing costs. ## Who can use it Conventional loans allow gifts of equity on principal residences and second homes, but not investment properties. FHA, VA, and USDA loans have their own rules, but all require the gift to be non-repayable. ## Step one: get an appraisal An independent professional appraisal establishes the home's fair market value. The seller and buyer use this appraised value to determine the sale price and calculate the gift of equity amount. ## Step two: gift letter required The seller must write and sign a gift of equity letter confirming to the lender that the below-market price is a genuine gift, not a disguised loan. This formal document is essential for lender approval. ## Step three: lender review The lender reviews the appraisal, agreed sale price, and gift letter before approving the loan. Timing varies by lender, appraisal turnaround, and title work requirements. ## What the gift can cover A gift of equity can be used toward the buyer's down payment and closing costs. It cannot cover financial reserves that lenders require after closing. ## Conventional loan rules Conventional loans typically require 3% to 5% down. A gift of equity can cover 100% of the down payment in many eligible transactions, depending on the specific program and minimum borrower contribution rules. ## FHA loan rules FHA loans require a 3.5% minimum required investment. A gift of equity can satisfy this entire minimum in eligible transactions, meaning the buyer may not need to contribute their own funds toward the down payment. ## VA and USDA loan rules VA loans require 0% down and have limited gift-of-equity use. USDA loans also require 0% down but must apply the gift as a purchase price reduction, not for closing costs or reserves. ## Gift letter requirements The gift letter must include the donor's name and contact info, recipient's full legal name and address, property address, dollar amount, relationship between parties, and a statement that no repayment is expected. Both parties must sign and date it. ## Seller tax filing rules The IRS annual gift tax exclusion is $19,000 per recipient in 2026, or $38,000 if two spouses each make a gift. Gifts above this threshold require filing IRS Form 709, though this doesn't necessarily mean owing taxes. ## Lifetime exemption protects most gifts Each individual has a $15 million lifetime estate and gift tax exemption in 2026. Unless a gift exceeds the donor's remaining lifetime exemption, there generally won't be any federal gift taxes to pay. ## Buyer's tax basis consideration When you buy a property for less than fair market value in a part-sale, part-gift transaction, your tax basis is generally the greater of the amount you paid or the donor's adjusted basis. This could result in higher capital gains taxes when you sell. ## Primary residence exclusion applies The IRS primary residence exclusion allows up to $250,000 in gains for single filers and $500,000 for married filing jointly. You must own and live in the home for at least two of the five years before the sale. ## Seller must check mortgage balance If the seller still carries a mortgage, it must be paid from sale proceeds first. Sellers should verify that the sale proceeds are sufficient to pay off the mortgage and closing costs before committing to a price. ## Gift of equity vs seller concession A gift of equity reduces the purchase price before the loan is structured, while a seller's concession is a credit applied at closing after the price is set. Gift of equity has no set caps; seller's concession is capped at 3% to 9% depending on loan type. ## Key advantages for buyers A gift of equity covers down payment without draining savings, can help avoid private mortgage insurance if it results in 20% equity, and lenders treat it as real equity from day one. No cash changes hands for the gifted portion. ## Key drawbacks to consider The seller receives less cash from the sale. The process requires a professional appraisal, formal gift letter, and full lender review. Gifts above the annual exclusion require filing IRS Form 709, and the buyer's tax basis can become complicated. ## Key takeaway A gift of equity is when a seller agrees to sell below appraised value, letting the buyer use the difference toward their down payment and closing costs, with minimal tax consequences for most family transactions.