What is a gift of equity?

Last updated September 1, 2026

By Cade Cashman, Principal Agent, Ascension Estates at Equity Union Real Estate. DRE #02222044.

A gift of equity is the difference between what a home is worth and the lower price a family member pays for it. The seller gives that difference as a gift instead of handing over cash. The buyer's lender counts the gift toward the down payment, so a child can often buy the family home with little or no money out of pocket.

It sounds like a private family matter. It is actually a transaction with a lender, the IRS, and the county assessor all watching. Get the paperwork right and it is one of the cleanest ways to keep a home in the family. Get it wrong and the surprise arrives a year later as a tax bill.

How does a gift of equity work in a home purchase?

Take an illustrative example, clearly labeled as one. Say a house appraises at $900,000. The parents agree to sell it to their daughter for $700,000. The $200,000 gap is the gift of equity.

No cash moves for that gap. The daughter gets a loan for the price she is paying, and the lender treats the $200,000 of built-in equity the way it would treat a cash down payment. She closes owning a home with equity already in it.

The pieces have to line up in the paperwork.

Those requirements come from the loan rulebooks. Fannie Mae's Selling Guide covers gifts of equity in section B3-4.3-05, and it generally limits the donor to family and certain close relationships. FHA has its own version with its own rules. Your lender will tell you which rulebook your loan follows, and the lender's checklist controls.

Do you pay gift tax on a gift of equity?

Here is the part that scares families for the wrong reason. A gift tax return is often required. Actual gift tax is almost never owed.

The IRS lets every person give up to an annual exclusion amount to each recipient every year with no return and no tax. That amount is adjusted over time, so we will not print it here. Check the gift tax pages at irs.gov for the current figure.

Give more than the exclusion to one person in one year and the giver generally files Form 709, the federal gift tax return. Filing is not paying. The amount above the exclusion simply counts against the giver's lifetime exemption, a much larger figure that also changes with the law. Tax only comes due once lifetime gifts pass that exemption, which is rare.

Three details worth knowing before you meet the CPA.

• The giver files, not the receiver. Gift tax is the responsibility of the person making the gift. The recipient generally reports nothing and owes nothing.
• Two parents can each give. Each parent has their own annual exclusion for each recipient. A couple giving to a child and the child's spouse has four exclusions to work with.
• The gift is measured against fair market value. That is why the appraisal matters to more than the lender. Price the home too low against a weak value estimate and the gift is bigger than you planned.

This is not tax advice. Gift tax, the annual exclusion, and the lifetime exemption have moving parts and moving numbers. Have a CPA or tax attorney structure the gift before you open escrow, not after.

Will a family sale below market raise the property taxes?

In California, this is the trap. The discount that helps your child at the bank can hurt them at the county.

A sale from parent to child is a change in ownership. The assessor does not care that the price was a family price. Since Proposition 19 took effect in February 2021, the parent-child exclusion from reassessment is narrow. In general, the child has to make the home their own principal residence within a year and file the claim on time. Even then, only a limited amount of value above the old taxable value is protected, a cap the Board of Equalization adjusts and publishes at boe.ca.gov. Value above the cap gets added to the assessment.

If the child does not move in, the exclusion generally does not apply at all. The county reassesses at market value as of the transfer, and a Prop 13 tax base built over decades resets in one step. On a long-held home in Calabasas or Thousand Oaks, that can multiply the annual tax bill.

Run the scenario before you sign anything. We wrote up the whole law in Prop 19 explained, and our Prop 19 calculator shows what a reassessment would do to the bill for a specific home.

What happens to the buyer's cost basis?

This is the catch families discover years later, at the next sale.

When you buy a home at full price, your cost basis is what you paid. When part of the deal is a gift, the gifted part generally carries the giver's old basis over to you. The IRS explains the rules in Publication 551, Basis of Assets. In a part-sale, part-gift deal the buyer's basis is generally the greater of what they paid or the seller's adjusted basis, and the details belong to your CPA.

Compare that with inheriting. Property received at death generally gets a stepped-up basis, reset to fair market value on the date of death. The decades of gain vanish for income tax purposes. We cover it in selling an inherited house in California.

So the same house can reach the same child two ways with very different tax futures. Gifted during life, the child may inherit the parents' low basis and face a large taxable gain when they eventually sell. Inherited at death, the basis resets. That is a real argument for waiting in some families, and a bad one in others, because the child may need the home now and gain can be managed later. The point is to decide with the numbers on the table, with a CPA in the room.

Does the seller owe capital gains tax on a gift of equity sale?

Maybe. Selling below market does not erase the seller's gain on the part that is a sale. The seller's own basis and the price actually received drive the math, and the gifted portion generally cannot be claimed as a loss to a related buyer.

If the home was the seller's principal residence for at least 2 of the last 5 years, the Section 121 exclusion can shelter up to $250,000 of gain, or $500,000 for a married couple filing jointly. Those amounts are set by federal law and have not changed since 1997. The full mechanics are in capital gains when you sell a California home.

One honest limitation. A part-gift, part-sale between family members sits at the intersection of income tax, gift tax, lending rules, and California property tax, and the four sets of rules do not care about each other. This page shows you the map. It cannot run your route. A one-hour meeting with a CPA before escrow opens is the cheapest part of the whole transaction.

This is not tax or legal advice. Gift tax figures change, Proposition 19 claims have strict deadlines, and basis rules turn on facts we cannot see from here. Use a CPA and, for the deed and contract, a real estate attorney.

How do you actually do it?

The clean sequence looks like this.

• 1. Get the value first. Order an appraisal or a serious market analysis before you pick the price, so the size of the gift is a decision, not an accident.
• 2. See the CPA. Size the gift against the annual exclusion, plan the Form 709 filing if one is needed, and hear the basis consequences out loud.
• 3. Check Prop 19. Decide whether the buyer will occupy and file for the exclusion, and know what the tax bill becomes if not.
• 4. Talk to the lender early. Confirm the loan program allows a gift of equity from your relationship and get the gift letter format they want.
• 5. Open escrow like a normal sale. Real contract, real disclosures, real title and escrow. Family deals skip the marketing. They should never skip the paperwork.

If you are the owner weighing a family sale against a market sale, get the free Equity & Exit Report first. It shows your projected list price, your net after every cost, and a real cash offer range, so you know exactly what the gift is worth before you give it.