A guide to gifts of equity

Equity represents the difference between your home’s value and your outstanding mortgage balance. While homeowners typically liquidate this value by selling the home or accessing home equity, you can also give a gift of equity to someone.

This generous gift can help a family member buy a home, but there are gift tax implications to keep in mind.

Key takeaways:

• A gift of equity occurs when a homeowner sells a property to a family member for less than the fair market value.
• The difference between the home's value and the sale price serves as a down payment, helping the buyer avoid private mortgage insurance.
• Gifting equity requires a formal letter to your lender, an appraisal, and consideration of IRS gift tax limits.

What is a gift of equity?

A gift of equity occurs when a home is sold to a family member at a discount. The difference between the sale price and the fair market value becomes the buyer’s down payment. It's essentially a portion of the seller's equity in the property.

So when the owner of a property sells it to a relative at below market value – or for no compensation – the gift is the price difference. For example, let's say the homeowner sells their home to their son. The home has a market value of $500,000, and the owner sells it for $350,000. In that case, the gift of equity is $150,000.

Here are some common ways one might see a gift of equity:

• Parent to the child
• Grandparent, cousin, in-law to a relative by marriage, blood, or adoption
• Legal guardian to a child

Benefits of a gift of equity

Gifting equity gives your family member an incredible head start. Because they walk into their new home with instant equity, they have more financial flexibility. You can estimate the equity you have in your home by using the Rocket Mortgage home equity calculator.

A gift of equity can make homeownership more affordable, potentially nixing or reducing a down payment and private mortgage insurance (PMI).

When homeowners offer a gift of equity or "real estate," and sell the home to a family member, it can help relatives who might not have enough savings on hand for a down payment, knowing they did the right thing.

Gift of equity vs. non-arm's-length transactions

A gift of equity occurs only in a non-arm’s-length transaction, in which one or more parties to the sale have an existing relationship outside the purchase process. This can be family members, business partners, or a landlord. This can also count for step, foster, and adopted relatives.

While the sale of the home in a non-arm’s-length transaction might include a gift of equity, it need not. While there are differences in these transactions, they do require having an honest conversation, potentially hiring a real estate attorney, and drafting a purchase agreement. The relationship should also be disclosed to the lender up front.

Note that while there might be a different approach to the sale of a home, standard mortgage rates do apply.

Steps to gifting equity

Let's go for a deeper dive into how equity is gifted and how it can affect the home buying process.

1. Talk with your lender

When you give a gift of equity, you'll be required to write an equity letter. Usually, the gift of equity is between family members, but that's not necessarily always the case. Most lenders and loan programs (including FHA and conventional loans) restrict gifts of equity to family members.¹

If the lender only permits gifts of equity to family members, you may find that “family” is defined differently by lenders. Besides connecting with a lender, consider reaching out to a tax professional to learn more about the implications of a gift of equity that's unique to your set of circumstances.

2. Get a professional appraisal

When gifting equity, you'll also need a home appraisal. An appraisal gives valuable information about a property and justifies its fair market value (FMV). A home's fair market value needs to be assessed by an appraiser.

FMV is an estimate of the amount a home can be sold for. It's usually calculated by stacking it against prices of comparable homes that are sold nearby.

The FMV is used to determine the size of the gift of equity: Gift of Equity = Appraised Value – Agreed Sale Price.

3. Draft the gift of equity letter

A gift of equity letter is required because it gives lenders peace of mind that the gift of equity is indeed a gift and doesn't need to be paid back.

It needs to include the exact dollar amount of the gift, state that no repayment is expected, and note the donor's name, address, telephone number, and relationship to the buyer. It should also include the date the gift was given, along with the property's address (if applicable).

While the letter doesn't need to be notarized, it does need to be signed by the donor and donee. Plus, it must list the name of the trust or the estate account.

4. Deliver the letter to the lender

As mentioned, lenders need to approve the gift. That's to make sure the buyer of the home can indeed afford the monthly mortgage payments. Plus, they need to make sure the transaction is legitimate.

Most likely, the gift will be treated as a down payment. In turn, it'll reduce the loan-to-value ratio (LTV), which measures the amount you're financing on the home compared with the appraised value of the property. In turn, the higher your down payment, the lower your LTV.

You can submit your gift of equity letter in different ways. For example, you can send it via snail mail to the lender. Or you can often email it. If the lender is Rocket Mortgage, you can upload it using your Rocket Account.

5. Continue with the closing process

After the gift of equity letter is submitted and the lender approves it, the next step will be closing. The gift of equity will be listed on the Closing Disclosure.

It's important to review these documents carefully so the sale price reflects the gift. As mentioned, the gift of equity can be used to fund all or part of the down payment and closing costs. However, it can't be put toward financial reserves.

How to write a gift of equity letter

Drafting a gift of equity letter provides your lender with the documentation they need to verify the funds. Here’s an example of what one looks like:

DONOR TO COMPLETE

I, ____________________, am giving a gift of equity. The gift amount/percent is_______ . I am giving the gift to _____________________ (recipient’s name). The person receiving the gift is my _______________________________ (relationship to the recipient). The gift of equity will be used in connection with a mortgage loan transaction and involving the following property address: _____________________________________________________________________________________________________________________ (address of property being financed). I am not affiliated with the builder, developer, real estate agent or any other interested party to the transaction. The gift does not have to be repaid.

Gift Donor Printed Name: ______________________

Gift Donor Address: ________________________________________________

Gift Donor Telephone Number: ________________________

Gift Donor Signature: ___________________ Date:___________

RECIPIENT TO COMPLETE

– BORROWER – – DATE –

– BORROWER – – DATE –

Do you have to pay taxes on gifts of equity?

The IRS does have rules on gifting. While this is general information, it isn't intended for personalized tax planning. For information on your individual situation, consult a financial planner or tax professional.

The responsibility for paying gift tax falls to the donor. In some cases, if special arrangements are made, the donee might agree to pay the gift tax.

The annual exclusion may change year to year. In 2026, it’s $19,000 per donee. If a married couple wants to gift property they co-own to a donee, the annual exclusion is $38,000.

You may also need to file Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. While the IRS wants to know about gifts that exceed the annual exclusion limit, the basic lifetime exclusion that applies to estates is also applied to gifts given during one’s lifetime.

An example of paying taxes on gifts of equity

So, when might you be taxed on a gift of equity? Let's say you're a homeowner who gifts a property below market value to your child. The home's market value is $300,000, and you sell it to your child for $200,000, which nets a $100,000 gift of equity.

Per IRS limits, in 2026, there’s a $19,000 ($38,000 for a married couple) annual exclusion for individuals, which is how much you can gift each year before you likely have to file a gift tax return.

After the exclusion, it's likely the lifetime estate and gift tax exemption applies. In 2026, this amount was capped at $15 million ($30 million for a married couple). Note that the annual exclusion doesn't affect the lifetime estate and gift tax exemption amount.

Pros and cons of gifting equity

Gifting equity has its own advantages and drawbacks. Getting your head around both can help you steer clear of getting blindsided during the process:

Pros

• Tax benefits: On the seller's side, the gift can be put toward the annual gift exclusion or the lifetime gift and estate tax exclusion. This can help lower what they owe Uncle Sam.
• Keeps home within the family: A gift of equity can make homeownership a possibility for a family member who couldn't otherwise afford it. In turn, it can be passed along to loved ones.
• Reduced closing costs: A lower purchase price means lower closing costs. Plus, with a lower home price, the buyer will need less money to reach the 20% down payment threshold. In turn, this can mean dropping PMI.

Cons

• Still need to pay closing costs: When the title of the property is transferred to the new owner, they're still responsible for paying closing costs. It's a bill that can't be avoided.
• Might get hit with a gift tax: If the seller gifts equity in an amount that exceeds the gift tax exemption, they might have to pay a gift tax. The annual gift exclusion per donee for an individual is $19,000, and so it's possible, depending on the seller's situation.
• Seller loses out financially: By gifting equity, the seller misses out on potentially raking in a profit by putting the house on the market. How much they miss out depends on the home's market value and the amount of equity gifted.

FAQ

Here are answers to some frequently asked questions about gifts of equity.

Is a gift of equity a good idea?

A gift of equity can be an incredibly rewarding way to support a family member while keeping a property in the family. Buyers benefit from needing less cash to close and potentially dropping PMI. However, the seller misses out on the full profit they could make on the open market, and they'll need to carefully manage any gift tax implications.

Is there a maximum limit on gifts of equity?

A party can give as much as they want. However, there’s a gift tax trigger of $19,000 per donee. If you give more than that, you’ll have to file a gift tax form and count it against your lifetime basic exclusion. For example, if you and your spouse want to give away equity as a married couple, you can give up to $38,000 without having to fill out the gift tax form.

Can I use a gift of equity for investment property?

Most mortgage types generally allow a gift of equity to be used on a second home, not an investment property. A second or vacation home is a home that you live in at least part of the time. An investment property is one that you either rent out or purchase to rehab and flip for profit.

Do I have to pay taxes on a gift of equity that I receive?

In general, the recipient of a gift of equity does not have to pay gift tax. Gift taxes, if applicable, are the responsibility of the person giving the gift. However, if the gift exceeds the annual exclusion limit, the donor may need to file a gift tax return, and the excess amount may count toward their lifetime estate and gift tax exemption.

What do I have to do to get a gift of equity?

For buyers, the process is the same as the regular home buying experience. Apply for your mortgage, find your real estate agent, etc. Most of the burden is on the giver.

Who can give a gift of equity?

Generally, you can give a gift of equity to someone if you’re a family member (which includes legal guardians), engaged to the recipient, or a domestic partner. Loans backed by the federal government may restrict giving gifts of equity to family members only.

How do I give a gift of equity?

You'll need to write a gift of equity letter that includes the total amount of the gift. The letter should also list the property address, clearly define the owner-buyer relationship, and explain that the buyers won't need to repay the gift.

The bottom line: A gift of equity can help with closing costs

A gift of equity is a fantastic way to support a family member as they take the next step into homeownership. By giving them instant equity, you can help them cover their down payment and closing costs. Be sure to consult a tax professional and your mortgage lender to ensure a smooth process.

Ready to make a move? You can apply online with Rocket Mortgage.

¹ Rocket Mortgage is not acting on behalf of FHA or HUD.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

Rocket Mortgage is a trademark or service mark of Rocket Mortgage LLC or its affiliates.