How to Gift Home Equity to Reduce Taxes

You can gift a portion of the home equity you have earned in your home to a buyer during a real estate transaction. This typically occurs when you are selling your home to a family member and are not as concerned over the profit. The equity gift becomes the buyer's down payment, and the buyer can then take a smaller mortgage. You will also benefit slightly from this transaction.

When you sell a home, the profit you make on the sale counts as income to you. This is particularly true if you do not use the profit to purchase a more expensive home as you will net a gain. Gifting your home equity instead of selling it can minimize the gains you earn, and you will not have to pay taxes on those gains as a result.

If you are considering gifting home equity to reduce your taxable income this year, you will want to check with your accountant first to understand regulations on how much equity you can gift in a given year. You should also ensure the buyer you will be gifting equity to has approval from a mortgage to apply this equity as a down payment. Finally, you should understand tax implications may fall on the buyer later in life when your estate is settled. 

Gift of Equity

When you give a gift of equity, you are essentially selling your home for less than it is worth. In addition to the sales price, you are gifting the buyer the equity in the home. You may also gift equity without selling a home; in this case, you will simply be giving another party an ownership stake in your property. When this occurs, both parties sign a gift of equity letter. The seller may have to pay capital gains tax on the sales price of the property, taking into account the equity gift. The recipient will use the total sum listed on the gift of equity plus the sales price for cost basis calculations in the future.

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