If you’ve got parents who bend over backwards for you, congratulations, you’re one of the lucky ones. Seriously, take a break from whatever very important thing you’re doing and call them to say, “I love you.”
One way your dear old parents can help you spread your wings and fly (or at least get out of their basement) is through a gift of equity.
Imagine selling a house for less than it’s worth, and voila, the difference is your “gift”. It’s like getting a discount from the world’s best store: Mom & Dad Inc.
My gift of equity calculator will do the heavy lifting for you. In seconds, it figures out how much of this magical “gift” you’re getting.
Because, let’s be honest, math is hard and you’ve got video games to play.
Gift Of Equity Definition
A “gift of equity” is a way for family members to help each other purchase a home by giving a portion of the property’s equity as a gift.
This type of gift often occurs when parents sell their home to their children, but it can also happen between other family members. Here’s a breakdown of how it works:
How a Gift of Equity Works
A family member (usually parents) decides to sell their home to another family member (usually children) at a price below its market value.
The difference between the market value and the sale price is given as a gift. The buyer (the family member purchasing the home) can use this difference as a down payment.
Gift Of Equity Formula
To calculate the gift of equity, use the following formula:
Gift of Equity = Market Value − Sale PriceWhere:
- Market Value: Estimated market value of the property
- Sale Price: Discounted sale price the property was sold at
Example Calculation
- Market value of property: $300,000
- Agreed sale price to family member: $250,000
Now, let’s plug these numbers into the formula:
Gift of Equity = $300,000 - $250,000 = $50,000The gift of equity is $50,000.
There are also a couple of things to consider when doing the gift of equity:
- Gift Tax: The IRS considers this a gift, so the donor may need to file a gift tax return if the amount exceeds the annual exclusion limit.
- Annual Exclusion: In 2024, the annual gift tax exclusion is $18,000 per recipient. Anything above this amount requires reporting but not necessarily immediate taxation due to the lifetime exemption.
- Gift Letter: A formal letter should be provided stating the amount of the gift and that it does not need to be repaid.
- Appraisal: A professional appraisal is necessary to determine the fair market value.