Gift of Equity?

Question

I am looking to purchase a house from a family member the mortgage company I am working through asked if my family member would be willing to do a gift of equity since she is selling house to me below the appraised value. How does this work and how does it affect either party. Please help

Answer 1

What this allows, is for you to actually use the equity you are being given, in a form that's actually useful to you, in that it should reduce your rate, mortgage insurance, etc...

The gift needs to be accounted for for tax purposes, but only to the extent that whoever is giving it to you would exceed the amount you could get without paying estate tax upon their death. Unless their estate is worth $1 million or more, it's a non-issue.

They simply sign a form from the lender that they are giving you this gift, and there is no repayment required. Plain and simple, and it should save you money.

It will have a very nominal increase in closing costs for the seller, however, since the deed tax will be based off a higher sales price. We're talking maybe $200-300 on the high end. There could be a capital gains issue if they haven't lived in the home as their primary residence for at least 2 of the past 5 years as well, but if that's the case, you'll need to find a CPA before you proceed.

But this is common, we do it all the time.

Answer 2

May depend on the relationship. Either or both parent can gift $11,000 each per year if within the lifetime limit. Ditto for grand parents. I am unsure about other relatives. I believe parents/grand parents can also make a larger one time gift within the unified estate/gift limits without a taxable event. Check with a tax pro and/or an attorney.

If the family member does not fit the requirements of the gift tax laws you may have to declare the gift as income. Again - consult a tax pro.