doesn t avoid closing costs
may trigger a gift tax for the givermore capital gains may be incurred in the future because of the impact to property s cost basislower value could affect local real estate marketrequirements for a gift of equitya gift of equity requires a gift of equity letter which is a letter stating the facts of the sale signed by the seller and the buyer the letter must note who is offering the gift the amount of the gift of equity and the property in question it must also attest that it is in fact a gift not a loan 6here are other items that must be included in the letter at closing a second letter will note the gift of equity it s up to the person making the gift to decide how much equity to give for example suppose you sell your home to one of your adult children the home is appraised at 400 000 but you agree to sell it for 200 000 giving them a 200 000 gift of equity that sale price is up to you a gift of equity can help the new owner avoid the expense of private mortgage insurance example of a gift of equitya lender usually considers gifts of equity as part of the down payment required to qualify for a mortgage for example suppose a bank requires 20 down which is standard if you want to avoid mortgage insurance if the gift of equity made by the seller equals 10 of the home s value the buyer now only needs to make a down payment of 10 of the property s price here s a fuller scenario to illustrate these points suppose that you want to buy a home from a family member the home s fair market value is 600 000 which means that a 20 down payment is 120 000 if your family member sells the home to you for 550 000 giving you a 50 000 gift of equity you would only need 70 000 about 11 7 to cover the 20 down payment the amount required for the down payment is based on the kind of mortgage for example for an fha loan a gift of equity is allowed from a family member to cover a minimum 3 5 down payment as long as the home is the primary residence 