What is a Gift of Equity
A gift of equity is a home sale in which the seller agrees to give the buyer a certain amount of money to help with the purchase price of the home. In most cases, the money comes from the equity that the seller has built up in the home. For example, if a homeowner has owned a home for several years and it is now worth $200,000, they may have $50,000 in equity. If they sell their home and give the buyer a $10,000 gift of equity, they would still walk away with $140,000 from the sale.
Gift of equity deals are often used by family members or close friends who are looking to help each other buy a home. In order to qualify for a gift of equity, buyers usually need to obtain a loan from a lender that allows for such transactions. Additionally, buyers and sellers will need to provide documentation to prove that there is no Funny business going on and that the deal is truly a gift and not a loan. Gift of equity deals can be beneficial for both buyers and sellers, but it’s important to make sure that all paperwork is done correctly in order to avoid any issues down the road.
How to give a Gift of Equity
When you give a Gift of equity, you are giving the recipient a portion of the equity in your home. The gift can be given as cash, stocks, or other securities. To give a Gift of Equity, you will need to fill out a Gift Deed. The Gift Deed will list the names of the parties involved, the address of the property, the date of the transaction, and the amount of the gift.
Once the Gift Deed is signed, it must be recorded with the county recorder’s office. The recorder’s office will then send a copy of the deed to the mortgage company. The mortgage company may require that an appraisal be done to determine the value of the property. If you are giving a Gift of Equity to a family member, there may be tax implications. Be sure to consult with a tax advisor before making any decisions.
What are the benefits of a Gift of Equity
The main benefit of a Gift of Equity is that it can help buyers who might not otherwise be able to afford a home, enter the housing market. By receiving a lower purchase price, buyers are able to use their savings for other associated costs, such as closing costs or furnishing their new home. Additionally, due to the lower purchase price, buyers may also benefit from a lower mortgage payment each month. Although there are many benefits that come along with receiving a Gift of Equity, it’s important to remember that the property will still need to appraise for at least the sales price in order for the deal to go through.
What are the risks associated with a Gift of Equity
This can be a great way for a family member or friend to help a buyer with their down payment, but there are some risks associated with this type of transaction. One risk is that the appraiser may not value the home at the agreed upon price, which could result in the buyer having to come up with additional funds at closing. Another risk is that the buyer may not be able to get insurance on the property or may have to pay a higher premium due to the discounted purchase price. Finally, if the property is sold within a few years of the purchase, the buyer may end up owing capital gains taxes on the difference between the sale price and the original purchase price. While there are some risks associated with a Gift of Equity, it can still be a great way to help a family member or friend become a homeowner.
How to receive a Gift of Equity
The Steps to Receive a Gift of Equity are as follows: the home must first be appraised by an FHA-approved appraiser, next, the buyer and seller must execute a sales contract which includes the gift of equity letter, then the buyer must apply for a mortgage with an FHA-approved lender, and finally, the loan must be approved by the FHA. If you are considering receiving a Gift of Equity, it is important to consult with an experienced real estate agent to ensure that you are taking the proper steps to protect your interests.
What are the tax implications of a Gift of Equity
In order for a gift of equity to be eligible for special tax treatment, the buyer must be a family member of the seller. The most common type of family relationship is between parent and child, but other relatives may also qualify. When a property is sold through a gift of equity, the capital gain is typically exempt from taxation. However, there may still be some tax implications to consider. For example, if the property was purchased within the past year, the seller may be subject to what is known as the “recapture rule.” Under this rule, any depreciation that was taken on the property will be subject to taxation. As such, it is important to consult with a tax advisor before entering into a gift of equity transaction.
Conclusion
Ultimately, whether or not a Gift of Equity is right for you depends on your personal situation. If you are buying a home from a family member or close friend, and you trust that they are giving you a fair price, then a Gift of Equity can be a great way to save money on your down payment. However, if you are not comfortable with the idea of relying on the seller for an accurate property value, or if you are not confident in their ability to provide a good home, then it may be best to look elsewhere. Weigh your options carefully and talk to your real estate agent to see if a Gift of Equity is right for you.
