Gift of Equity Calculator
A Gift of Equity occurs when a property is sold by one party to another (often family members) for less than its market value. The difference between the market value and the sale price is considered the "gift" amount. This tool helps you calculate that specific amount.
Simply enter the property's estimated market value and the agreed-upon sale price to find the Gift of Equity amount. Ensure you use consistent currency units.
Calculate Your Gift of Equity
Understanding Gift of Equity
What is Gift of Equity?
A Gift of Equity is a way for a home seller to transfer value to a buyer, typically a family member, by selling the property for less than its appraised or market value. The difference between the market value and the lower sale price acts as a gift from the seller to the buyer. This gifted amount can sometimes be used by the buyer as part of their down payment or to increase their equity stake in the property from day one.
How it Works
When you use a Gift of Equity:
- The property must be appraised to determine its market value.
- The sale price is set below this market value.
- The difference is documented in the closing paperwork (often on the Closing Disclosure or equivalent) as a Gift of Equity from the seller to the buyer.
- Mortgage lenders have specific requirements for documenting Gifts of Equity, so it's crucial to work with your lender and closing agent.
Why Use Gift of Equity?
- Helps the Buyer: It can reduce the cash needed for a down payment, help the buyer qualify for a mortgage, or avoid Private Mortgage Insurance (PMI) if the gifted equity brings their loan-to-value ratio down.
- Benefits the Seller: Allows them to help a family member acquire property and may simplify the sale process compared to listing on the open market.
- Avoids Cash Transfer: The gift is the equity itself, not a direct cash sum transferred from seller to buyer, simplifying that aspect.
Tax Considerations
The Gift of Equity amount is subject to gift tax rules. In the United States, the person *giving* the gift (the seller) is typically responsible for reporting and potentially paying gift tax, though annual exclusion amounts and lifetime exemptions often mean no tax is actually owed. It is highly recommended that both the buyer and seller consult with a tax advisor (like a CPA) familiar with real estate and gift tax laws specific to their location before proceeding with a Gift of Equity transaction.
Note: This calculator provides the gift amount for informational purposes only. It does not constitute tax or legal advice. Consult a qualified professional.
Gift of Equity Examples
Here are some scenarios illustrating how a Gift of Equity is calculated and used:
Example 1: Parents Selling to Child
Scenario: Parents sell their house to their daughter.
Known Values:
- Property's Market Value: $350,000
- Agreed-Upon Sale Price: $300,000
Calculation: Gift Amount = Market Value - Sale Price
$350,000 - $300,000 = $50,000
Result: The Gift of Equity is $50,000. This $50,000 could represent 14.3% of the market value ($50,000 / $350,000), potentially helping the daughter reach a 20% equity position with a smaller cash down payment if she also puts some cash down.
Example 2: Sale Below Market with No Gift
Scenario: An investor sells a distressed property slightly below market value to a buyer for a quick sale, but it's not intended as a gift.
Known Values:
- Property's Market Value: $180,000
- Agreed-Upon Sale Price: $175,000
Calculation: Gift Amount = Market Value - Sale Price
$180,000 - $175,000 = $5,000
Result: The difference is $5,000. While technically a transfer of value below market, if not explicitly documented and intended as a gift by the seller (especially in non-family transactions), it might just be considered a low sale price rather than a Gift of Equity for mortgage/tax purposes. Intent and documentation are key.
Example 3: Using Gift for Down Payment
Scenario: A buyer needs a 20% down payment on a $400,000 market value home being sold by relatives.
Known Values:
- Property's Market Value: $400,000
- Agreed-Upon Sale Price: $320,000
Calculation: Gift Amount = Market Value - Sale Price
$400,000 - $320,000 = $80,000
Result: The Gift of Equity is $80,000. This amount is exactly 20% of the market value ($80,000 / $400,000), allowing the buyer to potentially purchase the home with no additional cash down payment, assuming the lender allows the full 20% equity gift.
Example 4: Calculating Equity with Cash + Gift
Scenario: Buyer purchases a home with a Gift of Equity and some cash down.
Known Values:
- Property's Market Value: $250,000
- Agreed-Upon Sale Price: $240,000
- Buyer's Cash Down Payment: $10,000
Calculation (Gift): Gift Amount = Market Value - Sale Price
$250,000 - $240,000 = $10,000
Calculation (Total Equity): Total Equity = Gift Amount + Cash Down Payment
$10,000 + $10,000 = $20,000
Result: The Gift of Equity is $10,000. The buyer's total initial equity is $20,000 ($10,000 gift + $10,000 cash). This represents 8% of the market value ($20,000 / $250,000).
Example 5: Gift Amount Below Annual Exclusion
Scenario: An aunt sells a small property to her niece for a reduced price.
Known Values:
- Property's Market Value: $100,000
- Agreed-Upon Sale Price: $92,000
Calculation: Gift Amount = Market Value - Sale Price
$100,000 - $92,000 = $8,000
Result: The Gift of Equity is $8,000. In the US (as of recent tax years), this amount is typically below the annual gift tax exclusion per recipient ($18,000 per person in 2024). This means the aunt likely wouldn't need to file a gift tax return for this gift.
Example 6: Calculating Sale Price Needed for Specific Gift
Scenario: A seller wants to give a specific Gift of Equity amount to the buyer.
Known Values:
- Property's Market Value: $500,000
- Desired Gift Amount: $100,000
Calculation (Sale Price): Sale Price = Market Value - Desired Gift Amount
$500,000 - $100,000 = $400,000
Result: To provide a $100,000 Gift of Equity on a $500,000 market value property, the agreed-upon sale price should be $400,000. (Note: This tool calculates the *gift* from market value and sale price, but this example shows the reverse calculation).
Example 7: Arm's Length Transaction (No Gift)
Scenario: A buyer and seller negotiate a standard sale price on the open market.
Known Values:
- Property's Market Value: $280,000
- Agreed-Upon Sale Price: $280,000
Calculation: Gift Amount = Market Value - Sale Price
$280,000 - $280,000 = $0
Result: The Gift of Equity is $0. This is a standard transaction at market value, with no gifted equity involved.
Example 8: When Sale Price Exceeds Market Value
Scenario: A buyer pays more than the market value for a property (uncommon, but illustrates the calculation).
Known Values:
- Property's Market Value: $200,000
- Agreed-Upon Sale Price: $210,000
Calculation: Gift Amount = Market Value - Sale Price
$200,000 - $210,000 = -$10,000
Result: The calculation results in a negative amount (-$10,000). This scenario does NOT involve a Gift of Equity from the seller to the buyer. The buyer is effectively paying above market value, perhaps due to bidding wars or unique circumstances. This calculator flags non-positive results as not a Gift of Equity.
Example 9: Gift of Equity with Mortgage
Scenario: Buyer gets a mortgage and uses a Gift of Equity.
Known Values:
- Property's Market Value: $320,000
- Agreed-Upon Sale Price: $260,000
- Buyer is getting a mortgage for $240,000.
Calculation (Gift): Gift Amount = Market Value - Sale Price
$320,000 - $260,000 = $60,000
Calculation (Equity): Total Equity = (Market Value - Mortgage Amount)
$320,000 - $240,000 = $80,000
Breakdown of Equity Sources: Gift of Equity: $60,000. Cash from Buyer: Sale Price - Mortgage Amount = $260,000 - $240,000 = $20,000. Total Equity = $60,000 (Gift) + $20,000 (Cash) = $80,000.
Result: The Gift of Equity is $60,000. The buyer comes to closing with $20,000 cash and the $60,000 gift, totaling $80,000 equity on a $320,000 market value home ($80,000 / $320,000 = 25% equity).
Example 10: Small Gift Amount
Scenario: A small reduction in price is given as a formal Gift of Equity.
Known Values:
- Property's Market Value: $220,000
- Agreed-Upon Sale Price: $215,000
Calculation: Gift Amount = Market Value - Sale Price
$220,000 - $215,000 = $5,000
Result: The Gift of Equity is $5,000. Even smaller amounts can be formally documented as a Gift of Equity if required by the lender or desired by the parties for tax or documentation purposes.
Frequently Asked Questions about Gift of Equity
1. What is a Gift of Equity?
It's the difference between a property's market value and a lower price agreed upon for its sale, typically between family members. The seller gives the buyer this difference in the form of equity in the property rather than cash.
2. Why would someone use a Gift of Equity?
It's commonly used to help a family member purchase a home by providing them with instant equity, reducing the amount they need to borrow or provide as a cash down payment. It can also simplify the selling process.
3. Is Gift of Equity considered a down payment?
Yes, lenders often allow the Gift of Equity amount to count towards the buyer's required down payment. This helps the buyer reduce the cash needed at closing and can help them qualify for better loan terms or avoid Private Mortgage Insurance (PMI).
4. Who can give a Gift of Equity?
Typically, lenders allow Gifts of Equity from close family members (parents, grandparents, siblings, children). Some may allow gifts from domestic partners or fiduciaries. Policies vary by lender and loan type.
5. Does a Gift of Equity have tax implications?
Yes, the amount of the Gift of Equity is subject to gift tax rules. The seller (donor) is generally responsible for any gift tax liability and reporting the gift if it exceeds the annual exclusion amount. Buyers (recipients) typically do not pay gift tax. Consult a tax professional.
6. How is the market value determined?
For mortgage purposes, the market value is almost always determined by a professional appraisal ordered by the lender.
7. Do I need special documentation for a Gift of Equity?
Yes. Lenders require a Gift Letter signed by both the donor (seller) and recipient (buyer) stating the amount of the gift and that no repayment is expected. This amount is also shown on the final Closing Disclosure (CD).
8. Can a Gift of Equity cover the *entire* down payment?
Often, yes, depending on the lender's requirements and the size of the gift relative to the purchase price/market value. Some loan programs might still require the buyer to contribute a small percentage of their own funds.
9. What if the agreed-upon sale price is *higher* than the market value?
In that case, there is no Gift of Equity from the seller to the buyer. The buyer is simply paying more than the appraised value.
10. Can a Gift of Equity be used with any type of mortgage?
It is commonly used with conventional and FHA loans, particularly for primary residences. VA and USDA loans have specific rules, and requirements can vary, so always confirm with your lender.
