Gift of Equity - A Growing Trend?

We have received numerous questions recently concerning the sale of real estate between family members and whether or not the seller may "gift" equity in the property to the buyer. In addition, our friends at Gateway Title Agency in Cleveland-OH have also identified the growing trend in the transfer of real estate between family members. In a recent blog posting, Rachel Torchia, Owner of Gateway Title Agency, states "Gateway Title received five title orders for real estate transfers between family members within a 24 hour period and closed two similar transactions within the past couple of days." This, coupled with the direct questions we are receiving from the field, calls for Real Finance Solutions to share information that may help your clients; both buyers and sellers.

First, is it acceptable to give a "gift of equity" when selling real estate? The answer is YES. Let's first examine the agency guidelines associated with a Gift of Equity:

• Both conventional and government underwriting guidelines call for the donor (seller) to be a direct relative of the recipient (buyer). a qualified relative is defined as the borrower's spouse, child, or other dependent, or by any other individual that is related to the borrower by blood, marriage, adoption, or legal guardianship. Fiance or domestic partner is also acceptable. (Source: AllRegs)


• Fannie Mae and Freddie Mac (conventional guidelines) call for the borrower to contribute 5% of the purchase price from their own funds into the transaction. Beyond the first 5%, the borrower may receive a gift of equity. Some programs designed for first time home buyers may allow a minimum of 3% from the borrower's own funds. If the gift of equity will contribute more than 20% of the sales price, the borrower does not need to document the use of their own funds.


• FHA (government lending guidelines) permit 100% of the required down payment (minimum - 3.5%) to be derived from a Gift of Equity.


• Every gift, whether a cash or Gift of Equity, must be supported by an executed gift letter; which outlines the relationship between the borrower and donor with all appropriate contact information as well as documentation for the source of funds being used for the gift.

In addition to the rules associated with using a gift for the purchase of real estate, our clients need to understand the IRS regulations surrounding gifts. A great source of information is made available by the IRS and may be found at: http://www.irs.gov/pub/irs-pdf/p950.pdf. We advise you to direct your clients to this publication and consult with a licensed tax professional to better understand the tax laws that must be followed.In general, the recipient of a gift does not pay taxes; but the donor may be subject to gift taxes. The current annual exclusion is $12,000.00 per individual; meaning that you may generally give a gift up to $12,000.00 each, to any number of people, and the gift will not be taxable (IRS Publication 950, page 6). Furthermore, a married couple can each give a gift of up to $12,ooo.oo to the same individual without being subject to gift tax. Again, advise your clients to consult with a tax professional to obtain sound counsel.

Real Finance Solutions strives to educate our team of professionals to remain current on trends that effect the real estate industry and benefit our clients.

Guidelines referenced in our material are for information purposes only and are not intended to interpret laws and regulations that are mandated by the Federal Government or any agency associated with mortgage lending; i.e. FHA, Fannie Mae, Freddie Mac.