This is How Property Gifts of Equity Work
Gifts of equity are real estate transactions in which homeowners can transfer ownership of their property to a family member, usually their child, at a price below the current market value. The difference between the property's appraised value and the reduced sale price establishes the gift of equity. This arrangement comes with a few unique characteristics that both parties should be aware of.
To start the transaction, a professional appraiser must determine the property’s market value. Then, the "seller," or donor, must sign a formal gift of equity letter: this document clarifies the relationship between the two parties and confirms that the equity bestowed is indeed a gift, not a loan to be repaid.
Apart from the obvious benefit of the donor’s equity gift, these arrangements also shrink the total amount paid at closing too. Since the sale occurs between two relatives, the absence of a real estate agent or broker eliminates the fees associated with these professionals altogether.
It's important to note that, regardless the equity gift value, the recipient must still be eligible for a mortgage equal to the appraised value of the property, though a substantial gift might eliminate the need for private mortgage insurance.
Federal gift tax considerations are relevant in these transactions as well. While there's an annual tax exemption threshold of $18,000 per recipient, most donors won’t incur a gift tax because of the elevated lifetime exemption — $13.61 million at present. Gift of equity donors are, though, required to report their gifts to the Internal Revenue Service (IRS) to ensure compliance regardless of the total gift amount.
Married couples have some leeway with gifts of equity; intermarital gifts are exempt from taxation if the spouse is a U.S. citizen. For non-citizen spouses, a higher tax exemption of $175,000 applies.
Gifts of equity have one potential downside — should the recipient decide to sell the property, the subsequent capital gains tax may exceed the amount that would’ve been incurred had the property been purchased at market value.
As tax laws are subject to change, qualified private counsel ensures accurate, up-to-date information on gifts of equity and their implications. If you're considering or navigating a gift of equity transaction, the Law Office of Marc Scolnick, P.C. has the team to help. Call us today at (718) 554-6445 to set up a FREE consultation.
Sources: Rocket Mortgage
https://www.rocketmortgage.com/learn/gift-of-equity
This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this post in any way seems to contradict the advice of counsel, counsel’s opinion should control over anything written herein. No attorney-client relationship is implied by this blog.