A gift of equity is a gift in which someone grants equity in a home to another person. Gifts of equity usually occur at the time that a home is sold, and they most commonly happen when homes are sold within a family, although gifts of equity can also be given to non-family members. There are some important tax considerations to be aware of when establishing a gift of equity and it may be helpful to consult an accountant or tax attorney before accepting such a gift.

In a simple example of how a gift of equity might work, a child could establish an agreement to buy a home from his or her parents, who own the house outright. They might agree that the value of the home is $100,000 US Dollars (USD) and that this should be the sales price. The parents might offer a gift of equity of $20,000 USD, meaning that they would write over $20,000 worth of the equity in the home to the child, requiring the child to come up with $80,000 to cover the rest of the price.

A gift of equity can in turn be used as a down payment on a loan. If it is large enough, a lender will accept it in lieu of a down payment. If not, or if someone wants to have more equity in the house from the start, more money could be provided as part of the down payment. For people who can handle a mortgage but do not have the funds for the down payment, a gift of equity can be an excellent solution, as they need minimal cash at closing.

For a gift of equity to be valid, a letter must be signed by both parties, indicating that the equity is being granted and noting the amount of equity being offered as a gift. Essentially, a gift of equity is like a cash gift, except that instead of handing people cash to use as a down payment, people give equity in the home directly. Before the loan will be approved, the bank will confirm that the value of the house has been accurately reported and it will also check the borrower for creditworthiness to confirm that the borrower will be able to manage the mortgage.

The tax implications vary, depending on an individual taxpayer's history and the amount of the gift. An accountant or attorney should be able to provide advice so that people can ensure that their taxes are filed honestly and appropriately. Tax agencies are on the lookout for situations which they believe are abusive or of questionable legality, and it is important to make sure that a gift of equity is processed and declared properly.