A guide to gifts of equity: What taxes to expect, how to write a gift letter, and more

Home equity is how much your property is worth, minus the amount of what remains – if any – on the existing mortgage on your property.

If you're thinking of giving a gift of equity, such as selling a home to a relative, you'll need a gift of equity letter. Gifts of equity come with a unique course of action and their own set of gift tax implications. Here, we'll walk you through the process, advantages and disadvantages, what pitfalls to steer clear of.

What is a gift of equity?

In a nutshell, a gift of equity is something that the seller of a home provides to the buyer. 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 below the market value – or for no compensation – the gift is the price difference, which is the financial gift. 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

What can a gift of equity be used for?

A gift of equity lets a homeowner help a family member by selling the home for below market value. In turn, this can make homeownership more affordable and potentially nix 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.

A gift of equity is different from non-arm's length transactions, which is when one or more parties to a sale have an existing relationship with each other outside of the transaction. 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 doesn't necessarily have to. However, while there are differences in a non-arm's length transaction in a sale of a home, it does require having an honest conversation, potentially hiring a real estate attorney, and drafting a purchase agreement. Note that while there might be a different approach to the sale of a home, standard mortgage rates do apply.

How is equity gifted?

Let's go for a deeper dive in on how equity is gifted and how it can impact 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, which we'll cover in just a bit. 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, as defined by Fannie Mae and Freddie Mac. Exceptions are rare.

If the lender only permits gifts of equity to be between 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. A home’s fair market value (FMV) 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 plays into the size of the gift of equity: Gift of Equity = Appraised Value – Agreed Sale Price.

Another way to see it: The difference between the appraised value and the agreed-upon sale price is the financial "gift," which the giftee, or the buyer of the home, can put toward the down payment.

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, specify that no repayment is to be expected, and note the donor's name, address, telephone number, and relationship to the buyer. It also should include the date the gift was given, along with the address of the property (if this applies).

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 will 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 legit.

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

You can submit your gift of equity letter in different ways. For example, you can send it via snail mail by dropping it into the mailbox to the lender. Or you can email it. If the lender is Rocket Mortgage®, you can upload it using your Client Portal.

5. Continue with the closing process

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

It's important to pore over these documents carefully so that the sale's price reflects the equity that has been gifted. 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

As we've talked about, it's important for mortgage lenders to receive a gift of equity letter. Not only does it assure the lender that the equity is a true gift, it also helps offer them peace of mind that identifies the source of the funds.

We’ve gone over what needs to be included, so let's look at an example of a gift of equity letter:

Do you have to pay taxes on gifts of equity?

The IRS does have rules on gifting. The responsibility for paying gift tax falls on the shoulder of 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 2025, it was up to $19,000 per donee. If a married couple wants to gift property that they co-own to a donee, the annual exclusion is $38,000 annually.

You'll also likely need to fill out Form 709, which is the United States Gift (and Generation-Skipping Transfer) Tax Return.¹

An example of paying taxes on gifts of equity

So when might you be taxed on a gift of equity? Let's say that you’re a homeowner and you gift a property that’s 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 the IRS limits, in 2025 there is a $19,000 annual exclusion per donee for individuals, which is how much you can gift each year without getting hit with a gift tax. After the exclusion, it's likely that the lifetime estate and gift tax exemption kicks in. In 2025, this amount was capped at $13.99 million. Note the annual exclusion doesn't impact the lifetime estate and gift tax exemption amount.

Pros and cons of gifting equity

Gifting equity comes with its own set of 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 there will be lower closing costs. Plus, with a lower price tag on the home, the buyer will need less money to hit the 20% down payment mark. In turn, this can mean dropping private mortgage insurance (PMI).

Cons

• Still need to pay closing costs: When the title of the property is transferred to the new owner, they're still on the hook 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’s too high, 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 market value of the home and how much equity was gifted.

FAQ

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

Is a gift of equity a good idea?

It is usually a good idea for both parties. The recipient can more easily afford a home and might avoid private mortgage insurance. The party giving the gift can make a significant gift with no money out of pocket.

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 individual. If you give more than that, you’ll have to file a gift tax form. 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 allow a gift of equity to be used on a second home, not an investment property.

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

No, you don’t. The person giving you the gift may be liable for paying taxes if they give enough throughout their lifetime, but the recipient won’t have to pay.

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. There are lenders who will allow anyone to give a gift of equity.

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 can help fund closing costs and be put toward part of or all of the down payment. In turn, it can help make becoming a homeowner more affordable to family members. If you're thinking of gifting equity, you'll want to be clued in to the pluses and minuses and better understand the process. That can make for a smoother process.

If you're using a gift of equity, you can use it to prequalify for a mortgage with Rocket Mortgage.

¹ This article is for informational purposes only, and is not a substitute for professional advice from a medical provider, licensed attorney, financial advisor, or tax professional. Consumers should independently verify any service mentioned will meet their needs.