Gift of Equity Calculator
Calculate the gift of equity in a real estate transaction where a seller sells a property to a family member below appraised value. Find the gift amount, down payment equivalent, and potential tax implications.
How to use this tool
- Enter appraised property value, agreed sale price, annual gift tax exclusion (per giver) and number of givers in the fields above.
- Results update instantly as you type — or click Calculate.
- Read your gift of equity and the full breakdown beneath it.
⚠ This tool provides general estimates for education only and is not financial, tax or legal advice. Figures may not reflect your situation — verify with a qualified professional.
Formula
Gift of Equity = Appraised Value − Sale Price
Taxable Gift = max(0, Gift of Equity − (Annual Exclusion × Number of Givers))
The gift may count toward the buyer's down payment; lenders typically require a gift letter.
How it works
A gift of equity occurs when a seller conveys property to a buyer (usually a family member) at a price below the appraised fair market value. The difference between the appraised value and the sale price constitutes the gift, which may satisfy all or part of the buyer's required down payment.
For gift tax purposes, each giver may exclude up to the annual IRS gift tax exclusion amount per recipient. Gifts above the combined exclusion count against the lifetime exemption but rarely trigger immediate tax. A formal gift letter is required by most lenders.
Worked example
Parents Selling Home to Child Below Appraisal
- Appraised value = $400,000; Sale price = $350,000
- Gift of equity = $400,000 − $350,000 = $50,000
- Gift as % of sale price = $50,000 / $350,000 × 100 = 14.29%
- Total annual exclusion (2 givers × $18,000) = $36,000
- Taxable gift = $50,000 − $36,000 = $14,000 (counts against lifetime exemption)
The gift of equity is $50,000 (14.29% of sale price), with $14,000 subject to gift tax reporting.
Common mistakes to avoid
- Assuming the full gift-of-equity amount is automatically tax-free: amounts exceeding the annual exclusion per giver (e.g., $18,000 per person in 2024) require a gift tax return (Form 709), even if no tax is ultimately due because of the lifetime exemption.
- Overlooking the buyer's carryover cost basis: when property is sold at a discount via gift of equity, the buyer's tax basis may be the donor's original basis, not the purchase price, affecting future capital gains.
- Expecting all lenders to accept gift of equity as a full down payment substitute: some loan programs (e.g., FHA) allow it, but conventional lenders may require a minimum borrower cash contribution depending on LTV.
Key terms
- What is a gift of equity?
- A gift of equity is the dollar difference between a home's appraised value and its below-market sale price, typically used in sales between family members.
- Can a gift of equity be used as a down payment?
- Yes. Most conventional, FHA, and VA lenders allow a gift of equity to satisfy down payment requirements, though a signed gift letter is required.
- Does a gift of equity trigger gift tax?
- Gifts above the annual exclusion ($18,000 per giver in 2024) must be reported to the IRS on Form 709, but typically no tax is owed unless the donor's lifetime exemption ($13.61M in 2024) is exceeded.
- What is the IRS annual gift tax exclusion?
- The annual gift tax exclusion is the amount each person can give to any individual each year without gift tax reporting. For 2024 it is $18,000 per donor per recipient.
Frequently asked questions
- Does a gift of equity require a formal appraisal?
- Yes, for lending purposes. The mortgage lender will require a licensed appraisal to establish the fair market value from which the gift amount is calculated. Without an independent appraisal, the lender cannot verify the gift amount or approve the loan.
- Can both spouses each gift the annual exclusion amount?
- Yes. Gift-splitting allows each spouse to give up to the annual exclusion (e.g., $18,000 in 2024), meaning a couple can jointly gift up to $36,000 per recipient per year without triggering a gift tax filing requirement.
- How does a gift of equity affect the seller's capital gains tax?
- The seller recognizes a capital gain based on the actual sale price (not the appraised value) minus their cost basis. The discounted sale price reduces the seller's proceeds and can lower or eliminate capital gains, but the buyer inherits a basis equal to the sale price for future gains calculations.