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. There may be tax consequences, however, depending upon how much you gift every year.
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.
Giving the Gift of Equity
The first thing to do to gift equity is to ascertain 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. Then you can calculate the amount of equity you will give. If you give 20 percent on $275,000, the gift of equity will be $55,000.
Formalizing the Gift
You'll also need to 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. The agreement of sale must specify that the transaction includes a gift of equity.
2019 Tax Consequences
The estate and gift tax is a special tax the IRS assesses against the estate of a deceased person who gave out a certain dollar value in gifts over her lifetime. If a taxpayer exceeds the lifetime gift limit and then dies, her estate will need to file an estate tax return and pay taxes on the amount in excess of the limit. For individuals who die in 2019, the lifetime limit is $11.4 million. If you never reach that amount, the estate tax will not apply to you.
For example, if a taxpayer has gifted $12 million during her life and then dies in 2019, her estate will need to file a tax return, and the estate will owe taxes on $600,000 (the amount she exceeded the limit).
Annual Exclusion Amount for Gift Taxes
Although the lifetime limit for gifting is $11.4 million as of 2019, not every gift counts toward that amount. Each year, every taxpayer has an annual gift exclusion amount per recipient. This means that the taxpayer can gift out gifts up to that exclusion amount without that gift counting toward the lifetime limit. Only gifts that exceed the annual exclusion amount to one person are included in the lifetime limit, and only to the extent that they exceed the annual exclusion. In 2019, the annual exclusion amount is $15,000, which is the same as it was for 2018. The amount increases at regular intervals.
So if a taxpayer gave her niece $15,000 in 2018 and $15,000 in 2019, those amounts won't count toward the lifetime limit. However, if she gave her niece $15,000 in 2018 and then another $15,000 later in the same year, the second gift will count toward the lifetime limit.
If the gift is equity, the rules still apply. If your house is worth $300,000 but you sell it to your brother for $250,000 in 2019, you're gifting him $50,000. Using the 2019 exclusion amount, $35,000 of that gift will count toward your lifetime gifting limit.
- 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.