A gift of equity is a home-sale structure in which the seller transfers part of the property's value to the buyer by agreeing to sell for less than its appraised value.
The formula is straightforward: appraised value minus agreed sale price equals the gift amount. No cash changes hands for the gifted portion, and the lender treats that difference as equity the buyer owns when the deal closes.
Fortune says the arrangement can help families keep cherished homes in the family while helping the next generation reach homeownership. In an eligible conventional transaction, the buyer can use the gifted equity toward the down payment and closing costs. Depending on the loan-to-value ratio, it may also help the buyer avoid private mortgage insurance, or PMI.
The process starts with an independent appraisal to establish fair market value. The seller and buyer then use that number to set the sale price and calculate the gift. Fortune's example shows a home appraised at $400,000 and sold for $320,000, creating an $80,000 gift of equity.
After the price is set, the seller writes and signs a gift of equity letter confirming to the lender that the below-market price is a genuine gift, not a disguised loan. The lender then reviews the appraisal, the sale price and the gift letter before approving the loan.
Fortune says conventional loans permit gift-of-equity transactions on principal residences and second homes, but not investment properties. FHA, conventional, VA and USDA loans all allow gifts of equity, though the rules differ. For FHA borrowers without significant savings, an eligible gift of equity can cover the entire 3.5% minimum required investment.
There are also tax rules. Fortune says the IRS annual gift tax exclusion is $19,000 per recipient in 2026, or $38,000 per recipient if two spouses each make a gift. Above that amount, the donor must file IRS Form 709, which generally draws down the lifetime exemption of $15 million per individual in 2026. Fortune adds that most family deals fall within limits where no federal gift tax is owed.
The buyer may also face a future tax issue. Under IRS rules, when a property is bought for less than fair market value in a part-sale, part-gift transaction, the tax basis is generally the greater of the amount paid or the donor's adjusted basis. That can matter later if the home is sold and capital gains tax is calculated.
Capital is rarely static, and family wealth is no exception. A gift of equity is one more reminder that ownership can move through a market without a traditional cash sale. For households trying to preserve property and lower the cost of entry, the structure can be useful. For everyone else, the fine print still matters: lenders want proof, the IRS wants disclosure, and the eventual tax bill can still show up at the exit.
