How to Give Equity as a Gift

Buying a house can be much easier without having to come up with a down payment. While programs exist that let borrowers put less than 20 percent down on a purchase, the borrower has to deal with private mortgage insurance as a result. This can add several hundred dollars a month to the monthly payment. If you are desperate to sell your house, or if you want to help out a close friend or relative, you can give a gift of equity. This means will sell the house for less than the appraised value. You get less money, but the buyer is better able to move forward.

Step 1

Obtain the value of the property being used by the lender. You might have your own appraisal, but the loan will be based on an appraisal obtained by the lender for the borrower. If you think your home is worth $300,000, but the lender’s appraisal is $275,000, the latter is the value you will use.

Step 2

Calculate the amount of equity you will give. If you give 20 percent on $275,000, the gift of equity will be $55,000.

Step 3

Write a gift-of-equity letter to the lender. Include your name, the property address, the buyer and the amount you will be granting. Sign the letter and send copies to the buyer, Realtor and lender. If you are unsure of the format, the lender should have a standard form letter.

Step 4

Deduct $13,000 from the gift of equity when preparing your taxes. By law, this is the maximum amount an individual can give another individual as a gift in a calendar year. Even though no actual money is changing hands, it is still considered a taxable item. File Form 709 with the IRS when you file your taxes. Include any amount greater than $13,000. If the gift of equity was $55,000, you need to report $42,000. This doesn’t necessarily mean you will pay taxes on this amount. You can give up to $1,000,000 in tax-free gifts over the course of your lifetime. If you haven’t used this exclusion to date, you will report the $42,000, but you'll still be able to give $958,000 in tax-free gifts over your lifetime.

Tip

  • If the property is being sold without the buyer getting a mortgage, the gift of equity is equal to the difference between the sales price and the market value. However, unless the buyer or seller decides to get an appraisal, there isn’t an accurate method to record the gift.
  • Consult a tax professional if you are unsure of the tax consequences of giving a gift of equity.

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