Families can use a gift of equity to help the next generation achieve their dream of homeownership, while also keeping their cherished homes in the family. This strategy, in which the seller transfers part of the home’s value to the buyer by reducing the purchase price below market value, can help cover a cash-strapped buyer’s down payment.  

Learn how a gift of equity works mechanically, what the tax implications are for both the buyer and the seller, and the paperwork requirements to decide if it’s the right option for you.

What is a gift of equity?

A gift of equity is when a home seller transfers part of their equity to the buyer by agreeing to sell the property for less than its appraised value. This structure can be useful when a family wants to pass a home to the next generation but the buyer can’t afford full market price.

The formula is simple: appraised value minus agreed sale price equals the gift amount. No cash changes hands for the gifted portion, and the lender treats the difference as equity the buyer owns from the moment the deal closes.

For conventional loans, gift-of-equity transactions are permitted on principal residences and second home purchase transactions. Investment properties are not eligible. Other loan programs have their own rules, but one commonality they share is that the gift cannot require repayment.

Compare the available mortgage rates in your area

How a gift of equity works

The process for selling a home with a gift of equity usually requires these basic steps.

Step 1: Appraisal. The home needs an independent professional appraisal to establish its fair market value. The seller and buyer can then use the appraised value to determine the sale price and gift of equity.

Example: Say the home appraises at $400,000 and the seller agrees to sell for $320,000. That $80,000 gap would be the gift of equity.

In an eligible conventional transaction, the buyer can use that equity toward the down payment and closing costs. Depending on the resulting loan-to-value ratio, the gift of equity may also help the buyer avoid private mortgage insurance (PMI)—a gift that potentially keeps on giving. 

Step 2: Gift of equity letter. Once the price is set, the seller writes and signs a gift of equity letter, which is a formal document confirming to the lender that the below-market price is a genuine gift, not a disguised loan. 

Step 3: Lender review. The lender reviews the appraisal, the agreed sale price, and the gift letter before approving the loan. Timing varies by lender, appraisal turnaround, and title work.

What can a gift of equity be used for?

A gift of equity can cover:

• Closing costs
• Down payment

It can’t cover:

• Financial reserves

Gift of equity rules by loan program

FHA, conventional, VA, and USDA loans all allow gifts of equity, but the rules differ.

Loan type	Down payment minimum	Can gift cover 100% of down payment?	Buyer’s own funds required?	Key limits
Conventional	Often 3% to 5%, depending on the program	In many eligible transactions, yes	Depends on the specific program and minimum borrower contribution rules	Permitted on principal residences and second homes; can fund down payment and closing costs but not reserves; investment properties excluded
FHA	3.5% minimum required investment	A gift of equity can satisfy the minimum required investment in an eligible transaction	Generally no, if an eligible gift of equity covers the full minimum required investment	Only family members may provide equity credit in a sale to other family members
VA	0% (no down payment required)	N/A	N/A	Limited use; check with your VA lender for gift-of-equity rules
USDA	0% (no down payment required)	N/A	N/A	Must be applied as a reduction to the purchase price; not eligible for funds to close or reserves, and no cash back to the borrower is allowed

Conventional
Down payment minimum	Often 3% to 5%, depending on the program
Can gift cover 100% of down payment?	In many eligible transactions, yes
Buyer’s own funds required?	Depends on the specific program and minimum borrower contribution rules
Key limits	Permitted on principal residences and second homes; can fund down payment and closing costs but not reserves; investment properties excluded
FHA
Down payment minimum	3.5% minimum required investment
Can gift cover 100% of down payment?	A gift of equity can satisfy the minimum required investment in an eligible transaction
Buyer’s own funds required?	Generally no, if an eligible gift of equity covers the full minimum required investment
Key limits	Only family members may provide equity credit in a sale to other family members
VA
Down payment minimum	0% (no down payment required)
Can gift cover 100% of down payment?	N/A
Buyer’s own funds required?	N/A
Key limits	Limited use; check with your VA lender for gift-of-equity rules
USDA
Down payment minimum	0% (no down payment required)
Can gift cover 100% of down payment?	N/A
Buyer’s own funds required?	N/A
Key limits	Must be applied as a reduction to the purchase price; not eligible for funds to close or reserves, and no cash back to the borrower is allowed

For FHA borrowers without significant savings, an eligible gift of equity can cover the entire 3.5% minimum required investment (MRI), meaning the buyer may not need to contribute their own funds toward the down payment.

What goes into a gift of equity letter

The gift of equity letter must contain all of the necessary details required by the loan program and lender to ensure that it is a legitimate transaction. Requirements vary, but the letter generally includes: 

1. Donor’s name, address, and telephone number
2. Recipient’s (buyer’s) full legal name and address
3. Property address
4. Dollar amount of the gift (e.g., “$80,000”)
5. Relationship between donor and recipient (e.g., “parent of the borrower”)
6. Statement that no repayment is expected or required, now or in the future
7. Dated signatures from both donor and recipient

For conventional loans, the file must also include the settlement statement listing the gift of equity. Some lenders may require a proprietary form in addition to a signed letter, so try to confirm what is needed before drafting the letter.

Gift of equity tax rules (2026)

A gift of equity has tax implications on both sides of the transaction, though most family deals fall well within the limits where no tax is actually owed.

For the seller (donor)

The IRS annual gift tax exclusion is $19,000 per recipient in 2026 (or a total of $38,000 per recipient if two spouses each make a gift). Above the annual exclusion, the donor must file IRS Form 709. This generally draws down the lifetime exemption, which is $15 million per individual in 2026. Unless the gift exceeds the donor’s remaining lifetime exemption,, there generally won’t be any federal gift taxes to pay.

As an example, if you gave a $200,000 gift of equity, you’ll need to file Form 709 (because it’s above the $19,000 threshold), but you won’t generally pay a gift tax (assuming the gift doesn’t push you past your remaining lifetime exemption).

For the buyer (recipient)

Recipients of gifts generally do not owe gift tax. However, there could be a tax consideration for buyers when they eventually sell the home.

Under IRS rules, when you buy a property for less than fair market value in a part-sale, part-gift transaction, your tax basis is generally the greater of the amount you paid or the donor’s adjusted basis, rather than the appraised value at closing. In other words, if the purchase results in a lower tax basis, you could end up paying more in capital gains tax when you sell. 

Keep in mind that the IRS primary residence exclusion still allows for up to $250,000 in gains for federal tax for single filers, and up to $500,000 for married filing jointly. You must generally own and live in the home for at least two of the five years before the sale. It might be worth a conversation with your tax advisor to go over the specific basis treatment and how it may impact future capital gains. 

What sellers should know

The most obvious trade-off for the seller is accepting less money from the sale, but there are a couple of other points to consider.

If the seller still carries a mortgage on the property, the mortgage must be paid from the sale proceeds first. If the remaining balance is close to the agreed sale price, the seller should make sure the sale proceeds are sufficient to pay off the mortgage and other closing costs. Run those numbers before committing to a price.

Sellers should also check whether they need to file IRS Form 709. If the gift exceeds the 2026 annual exclusion ($19,000 per recipient for one spouse or $38,000 total per recipient from two spouses), sellers may need to file the form. A tax professional can help determine the filing requirements.

Gift of equity vs. seller’s concession

A gift of equity and a seller’s concession both let a seller reduce what the buyer pays out of pocket at closing, but they’re structurally different and lenders treat them differently.

	Gift of equity	Seller’s concession
How it works	Reduces the purchase price before the loan is structured	A credit applied at closing, after the purchase price is already set
Limits	No set caps; based on home’s appraised value, agency eligibility rules, and lender’s underwriting requirements	Capped as a percentage of the purchase price: 3% to 9% for a conventional principal residence or second home, depending on LTV; 2% for an investment property, 6% for FHA
Best for	Best for when the goal is to build immediate equity and eliminate or reduce a cash down payment	Best for when the list price needs to stay intact, but the buyer needs help covering out-of-pocket closing costs
Who can provide it	Must be gifted from an eligible family member or partner	Can be offered by any seller to any buyer

How it works
Gift of equity	Reduces the purchase price before the loan is structured
Seller’s concession	A credit applied at closing, after the purchase price is already set
Limits
Gift of equity	No set caps; based on home’s appraised value, agency eligibility rules, and lender’s underwriting requirements
Seller’s concession	Capped as a percentage of the purchase price: 3% to 9% for a conventional principal residence or second home, depending on LTV; 2% for an investment property, 6% for FHA
Best for
Gift of equity	Best for when the goal is to build immediate equity and eliminate or reduce a cash down payment
Seller’s concession	Best for when the list price needs to stay intact, but the buyer needs help covering out-of-pocket closing costs
Who can provide it
Gift of equity	Must be gifted from an eligible family member or partner
Seller’s concession	Can be offered by any seller to any buyer

Here’s an example of how the two options can differ:

• A gift of equity deal on a $400,000 home might price it at $320,000, with the $80,000 gap covering the down payment.
• A seller’s concession deal might keep the price at $400,000 but have the seller credit the buyer $8,000 at closing to cover most closing costs, without touching the agreed purchase price.

Compare the available mortgage rates in your area

Pros and cons of a gift of equity

The takeaway

A gift of equity is one of the cleaner ways a family can transfer real estate without liquidating assets or arranging a complex financial structure, with no cash exchange required for the gifted portion. It’s worth consulting a tax professional to understand how the gift may affect the buyer’s tax basis and potential capital gains on a future sale. 

On the seller side, crunch your numbers if you need to pay off an existing mortgage so you can come up with a sale price that achieves your objectives. Once both parties are ready to move forward, work with the lender to craft the gift of equity letter to the lender’s specifications to avoid any closing delays.

Frequently asked questions

Is a gift of equity a good idea?

A gift of equity can be a great strategy if someone wants to sell to a family member and provide financial help without a cash exchange for the gifted portion. The seller agrees to lower the price to below market value, and that price difference can then be used toward the buyer’s down payment. To decide if it’s the right fit, consider tax implications and eligibility based on loan type.

Do I have to pay a gift tax if I give a gift of equity?

If you give a gift of equity, you generally won’t owe a gift tax unless your taxable gifts exceed your available lifetime exemption. If you go over the annual $19,000 exclusion per recipient in 2026, you will generally have to file IRS Form 709. However, filing Form 709 doesn’t necessarily mean you’ll owe gift tax. In 2026, each individual has a $15 million lifetime estate and gift tax exemption.

Does a gift of equity have to be repaid?

A gift of equity isn’t meant to be repaid. The gift of equity letter states that no repayment is expected or required, now or in the future.

Can a gift of equity cover my down payment?

A gift of equity is most commonly used to cover some or all of a buyer’s down payment and/or closing costs. The difference between the home’s appraised value and the lowered purchase price represents the gift. As an example, a home appraised at $550,000 that is sold to a family member for $500,000 gives a $50,000 gift of equity, which could be applied to the buyer’s down payment, subject to the program’s rules.

What paperwork is required for a gift of equity?

The main documentation required for a gift of equity includes a home appraisal and a gift of equity letter, which lays out the agreement between buyer and seller. Additional documentation requirements vary by loan program and lender. Sellers should also check whether they need to file IRS Form 709. A tax professional can help determine the filing requirements for their situation.