What Is a Gift of Equity?

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A gift of equity involves selling a piece of real estate for less than its current appraised market value. This often occurs with property sales within families and gives the buyer immediate equity in the home.

Key Takeaways

  • A gift of equity is when someone purchases a home or other property for less than its assessed value. It’s typically required to occur between family members.
  • The equity usually goes toward the buyer’s down payment and possibly closing costs, which can help them become a homeowner sooner and potentially avoid paying for PMI. 
  • Eligibility requirements often include a gift of equity letter, an approved relationship between the buyer and seller, and financial documentation.
  • Gifts of equity can have tax implications for both the buyer and seller, so it’s important to seek professional guidance for these transactions.

Definition and Example of a Gift of Equity

A gift of equity is when someone purchases a home or other property for less than its assessed value. This scenario usually occurs within families, such as parents selling their home to a child, based on lender requirements. However, some lenders or mortgage types may allow gifts of equity between other close contacts. The equity resulting from this kind of arrangement is the difference between the property’s current market value and what the buyer pays for it. 

Often, this equity counts toward your down payment and closing costs when you get a mortgage for the property. You may still need to add funds to reach the minimum down payment requirement for your mortgage, or to avoid paying for private mortgage insurance (PMI).

For example, let’s say your grandmother wants to sell her house and rent an apartment. The house is paid off and has a market value of $300,000. To keep her home in the family and help you out, your grandmother offers to sell you her house for $200,000. That means she’s giving you a $100,000 gift of equity, which far exceeds the 20% down payment you’ll need to avoid PMI.

How a Gift of Equity Works

A home’s current market value typically depends on factors such as its location, age, supply and demand in the local housing market, exterior and internal features, and competing properties. As in a typical home buying process, you’ll need to get an appraisal to determine the home’s market value. The seller will use this information to decide on their price, and your lender will use it to decide whether the loan amount is appropriate for the home. The difference between the appraised value and the selling price is the gift of equity you receive, which most lenders will apply toward the down payment and closing costs. 

The seller has full control over the price they choose to charge you. For example, they might decide to charge you 20% less than the appraised value, which would cover your down payment and help you avoid paying for PMI. 


The seller will need to consider gift taxes when setting their price. A single seller can gift you up to $15,000 in equity without paying the gift tax, and if the sellers are married co-owners, the limit is $30,000. However, if the gift exceeds that amount, the seller will have to file a gift tax return.  

Once you’ve agreed on a price, a lawyer usually writes a contract detailing the gift of equity and the transaction often moves forward without a real estate agent. You’ll work with your lender to satisfy the requirements for a gift of equity and get approved for a mortgage. If the equity is less than what you need for the down payment, you might use your own funds or seek other down payment assistance


Receiving a gift of equity offers you an advantage if you ever need to borrow against your home’s equity, such as by taking out a home equity line of credit or home equity loan

Criticisms of Gifts of Equity

Before someone can give a gift of equity, they must own a home. The clear racial homeownership gap—nearly 30 points between Black homeownership (44.6%) and White homeownership (74.2%) in 2021—means that fewer Black families are in a position to pass on wealth in this way. This gap is an example of structural inequality resulting from discriminatory practices in access to home financing, such as being offered higher interest rates, as well as gaps in access to credit.

The seller must also be in a financial position to give away a potentially large amount of money—which they could have had themselves by selling the home at market rates. Income inequality, wealth inequality, and the growing racial wealth gap have created clear divides in terms of who is able to use gifts of equity to benefit their loved ones, and who is not—which perpetuates current disparities.

Gift of Equity vs. Down-Payment Gift

A gift of equity is an alternative to a mortgage down-payment gift from a family member or friend. However, this type of home-buying assistance is less flexible, since it’s tied to a specific property. 

Gift of equity Down-payment gift
Provided by the seller of a property to the buyer Provided by certain family members or entities specified by the lender
Applies to a specific property Can be applied to any property
Requires a gift letter Requires a gift letter
Lender requirements apply Lender requirements apply
Subject to gift tax limits Subject to gift tax limits

When you receive a down-payment gift, you have the option to buy any property you like, as long as you can afford it and it meets your lender’s requirements for your mortgage. This flexibility means you can more easily find a property that fits your needs, rather than being limited to a property owned by a family member. As with gifts of equity, down-payment gifts must meet lender requirements such as being supplemented with some of the recipient’s own funds. 

Pros and Cons of a Gift of Equity

  • Immediate home equity for the buyer

  • Buyer can save on upfront costs and PMI

  • Makes homeownership more accessible

  • Save on real estate commissions

  • Keeps property in the family

  • Potential gift tax for the seller

  • Potential capital gains taxes for the buyer

  • Restrictions on eligibility

  • Need to pay legal fees

  • Limited to the offered property

Pros Explained

  • Immediate home equity for buyer: Receiving this type of gift means you’ll begin homeownership with equity in your property. This benefit allows you to take out home equity loans to do home improvements, pay off other debt, or make other purchases potentially sooner than you might have been able to do otherwise. 
  • Buyer can save on upfront costs and PMI: The buyer can use the gift of equity to top up their down payment or even cover it entirely, which could help them avoid paying PMI. The gift can also potentially be applied to other closing costs
  • Makes homeownership more accessible: A gift of equity can make it more financially feasible to become a homeowner without having to wait while you save up a down payment.
  • Save on real estate commissions: The seller can save on real estate agent commissions, since these transactions typically take place without an agent. 
  • Keeps property in the family: A gift of equity is one way for parents or grandparents to pass on ownership of a family home to the next generation. 

Cons Explained

  • Potential gift tax for the seller: If the seller’s gift of equity exceeds the annual exclusion, it may trigger a gift tax. To continue our earlier example, the grandmother’s gift of $100,000 in equity means that she would need to file a gift tax return.  
  • Potential capital gains tax for the buyer: While you won’t have to deal with them until you eventually sell the home, capital gains taxes can be higher on a property you bought using a gift of equity. That’s because the gift results in a lower cost basis, which can mean higher taxes if you have a substantial profit when you sell the home. 
  • Restrictions on eligibility: Lenders require specific relationships between the buyer and seller and restrict property types for gifts of equity. 
  • Need to pay legal fees: While you might avoid paying real estate commissions, you’ll need to pay a lawyer to help you handle this transaction. 
  • Limited to the offered property: Since a gift of equity is tied to a specific property, it’s less flexible than a cash down-payment gift.

How To Get a Gift of Equity

As the buyer, you’ll need to check with your lender to determine its requirements and necessary documentation. Often, lenders will accept a gift of equity for the buyer’s first or second home, though this depends on your mortgage program. For example, conventional mortgage programs usually allow both types, while FHA loans can typically only be used to buy a primary home. 

Lenders and specific mortgage types may also specify required relationships between buyers and sellers. For example, Fannie Mae limits donors to family members who are related by blood, marriage, adoption, legal guardianship, or domestic partnership.

During the mortgage application process, lenders will require the seller to write a gift letter that details the amount, your relationship, and a statement that no repayment is expected. You can also expect the lender to look at the results from the appraisal and to request financial records for both you and the seller.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Instructions for Form 709 (2020)." Accessed Nov. 10, 2021.

  2. Census.gov. "Quarterly Residential Vacancies And Homeownership, Second Quarter 2021," Page 9. Accessed Nov. 10, 2021.

  3. Zillow. "Expanding Access to Credit Could Shrink the Homeownership Race Gap." Accessed Nov. 10, 2021.

  4. Joint Center for Housing Studies of Harvard University. "High-Income Black Homeowners Receive Higher Interest Rates than Low-Income White Homeowners." Accessed Nov. 10, 2021. 

  5. Institute for Policy Studies. "Report: Ever-Growing Gap." Accessed Nov. 10, 2021.

  6. Fannie Mae. "Selling Guide: Who Are Acceptable Gift Donors?" Accessed Nov. 10, 2021.

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