Gift of Equity: What to Know When Transferring a Home From Parent to Child
Family homes hold memories, but sometimes they can also help the next generation build financial security. One way parents help their children buy a home is through a gift of equity. If you’re considering transferring your house to your child, or you’re the child wondering how it works, this guide breaks down the essentials.
What Is a Gift of Equity?
A gift of equity happens when a homeowner sells a property to a family member for less than its market value — the difference between the market value and the sale price is considered a gift.
Example:
Let’s say your home is worth $800,000 but you sell it to your child for $600,000 — that $200,000 difference is the “gift of equity.”
Why Families Use a Gift of Equity
✅ Helps kids become homeowners sooner — They may need a smaller mortgage and can avoid saving a huge down payment.
✅ Keeps the property in the family — Good for multi-generational wealth planning.
✅ May help avoid capital gains taxes later — Talk to a tax professional, but some families do this as part of estate planning.
How Does a Gift of Equity Work?
Here’s a simple rundown:
1️⃣ Get a professional home appraisal — Lenders will need it to document the home’s fair market value.
2️⃣ Document the gift — Lenders require a signed gift letter explaining the amount, who’s giving it, and that it doesn’t need to be repaid.
3️⃣ Work with a mortgage lender — Many lenders allow a gift of equity as a down payment or to meet minimum equity requirements.
4️⃣ Understand tax implications — Gifts over the annual exclusion limit (currently $18,000 per person in 2024) may require filing a gift tax return.
Are There Taxes on a Gift of Equity?
Maybe — but not always.
• The parent may need to file a gift tax return if the amount exceeds annual exclusions, but they may not owe taxes immediately because of the lifetime exemption.
• The child may face higher capital gains taxes when they sell later because their tax basis is based on the parent’s original purchase price plus improvements — not the lower sale price.
Pro tip: Always talk to a CPA or estate attorney to get advice for your situation.
Key Pros and Cons
✅ Pros
• Makes homeownership more affordable for the child
• Keeps the home in the family
• Builds family wealth
⚠️ Cons
• Possible gift tax reporting for the parent
• Child inherits the parent’s original tax basis
• Requires careful paperwork with lender & title company
Final Thoughts
A gift of equity can be a win-win for parents and children, but it’s important to handle it correctly. Work closely with your real estate agent, lender, and tax advisor to make sure it’s a financial blessing — not a future headache.
Thinking About Gifting a Home to Your Child?
If you’d like to talk through how this could work for your family here in our community, I’m happy to help answer questions and connect you with trusted lenders and tax pros. Just reach out anytime!
