If a family member is willing to sell you their home, you may have access to one of the most powerful — and least understood — first-time-buyer tools out there: a gift of equity. Done right, it can let you buy a home with little or no cash down and even skip mortgage insurance entirely. Here’s exactly how it works, the tax rules on both sides, and what to watch for.
What is a gift of equity?
A gift of equity happens when a family member sells you their home for less than its market value, and the difference is treated as a gift toward your purchase. That gifted difference becomes your down payment — without any money actually changing hands for it.
Example: Your parents’ home appraises for $300,000, but they agree to sell it to you for $240,000. That $60,000 difference is a gift of equity — equal to a 20% down payment — even though you never had to save or transfer that $60,000 yourself.
Why it’s so valuable for first-time buyers
- Little or no cash down. The gifted equity covers your down payment, so you may bring almost nothing to closing.
- Skip mortgage insurance. If the gift gives you 20% equity on a conventional loan, you can avoid PMI entirely — a significant monthly savings for the life of the loan.
- Instant equity. You start out owning a real stake in the home, which cushions you against market dips.
- Lower transaction costs. A family sale often skips or reduces agent commissions and marketing steps.
How the process works
- Get an appraisal. An official appraisal establishes the home’s true market value — the basis for the gift.
- Agree on a sale price. The gap between market value and sale price is the gift of equity.
- Sign a gift of equity letter. Similar to a gift funds letter, it states the amount of equity being gifted, the relationship, and that no repayment is expected.
- Write it into the purchase contract. The contract reflects both the sale price and the gift.
- Close like a normal sale, with the gifted equity credited as your down payment on the closing statement.
Which loans allow a gift of equity?
Both conventional and FHA loans permit gifts of equity for a primary residence purchased from a family member. FHA generally requires the gift to come from a relative and treats it as an “identity of interest” transaction with its own documentation requirements. Your lender will guide the exact paperwork, so tell them upfront that you’re buying from family with a gift of equity.
Tax implications to understand
There are two sides to consider, and neither usually results in a tax bill — but you should know how each works:
- For the seller (donor): A gift of equity above the annual gift-tax exclusion (around $19,000 per recipient; check the current figure) requires filing IRS Form 709. It counts against the donor’s large lifetime exemption, so actual gift tax is rarely owed. A couple selling to a couple can gift a substantial amount tax-free by combining exclusions.
- For you (buyer): You owe no tax on receiving the gift. However, your cost basis in the home is generally the price you paid, not the market value — so if you sell later for a big gain, your taxable profit could be larger. The primary-residence capital-gains exclusion often covers this, but it’s worth a quick chat with a tax professional.
Things to watch out for
- Get a real appraisal. The gift is based on documented market value, not a number you pick out of the air.
- Keep it arm’s-length on paper. Proper contracts and a gift letter keep everything above board with the lender.
- Consider the seller’s finances. Selling below market value reduces the seller’s proceeds and could affect their own plans; make sure it works for them.
- Closing costs still apply. Even with no down payment, budget for closing costs — though seller concessions or gifted funds can help cover them.
- Watch for Medicaid look-back rules if the seller is elderly, as gifting assets can affect eligibility. A quick professional check is wise.
Gift of equity vs. a cash gift
A gift of equity applies when you’re buying a relative’s home below value. If your family simply wants to hand you money toward a home you’re buying from someone else, that’s a straightforward cash gift — covered in our down payment gift funds guide. Both are legitimate; they just fit different situations.
Frequently asked questions
Can a gift of equity be my entire down payment?
Yes. If the gifted equity meets or exceeds your loan’s down payment requirement, it can cover it entirely — and reaching 20% can eliminate PMI on a conventional loan.
Who can give a gift of equity?
Typically a family member selling you their home — parents, grandparents, or other relatives, depending on the loan program’s rules.
Do I pay taxes on a gift of equity?
No, the buyer doesn’t. The seller may need to file a gift-tax form for large gifts but rarely owes tax. Keep in mind your future capital-gains basis is the price you paid.
Does the home still need an appraisal?
Yes. The lender requires an appraisal to establish market value, which determines the size of the gift and the loan.
The bottom line
A gift of equity is a family-powered shortcut into homeownership: buy a relative’s home below market value, use the discount as your down payment, and potentially skip PMI and most of your cash-to-close. Get a proper appraisal, document it with a gift of equity letter, and loop in your lender and a tax professional early. For non-family help, our guide on down payment gift funds covers the cash-gift route.