Gift of Equity Calculator

A gift of equity occurs when a property owner sells a home to a buyer—typically a family member—at a price below its verified fair market value. The difference between these two figures is treated as a monetary gift, which the buyer can often use as a down payment. The core equation is straightforward: Gift of Equity = Market Value - Sales Price. If the market value exceeds the sales price, the resulting positive difference represents the equity granted to the buyer.

Imagine a scenario where a parent sells their family home to their adult child. A professional appraisal establishes the current fair market value of the property at $400,000. However, out of generosity, the parent agrees to set the final sales price at $320,000. Applying our formula, we subtract the sales price from the market value: $400,000 - $320,000 = $80,000. In this case, the child receives an $80,000 gift of equity, which can serve entirely as a down payment to secure their mortgage without needing out-of-pocket cash.

Always secure a formal, independent appraisal to verify the true market value before finalizing any paperwork, as mortgage lenders require objective valuation proof. Ensure you draft a formal gift letter stating that the equity transfer is a true gift with no expectation of repayment. Finally, consult a qualified tax professional or real estate attorney to understand potential gift tax reporting requirements and lender-specific guidelines.