Gift of Equity Calculator — family sale price, down payment and carryover basis

A gift of equity is what happens when someone sells a property to a family member for less than it is worth and lets the difference stand in place of cash. The parents' house appraises at $400,000, the contract is written at $340,000, and the $60,000 gap becomes the buyer's down payment without a dollar changing hands. This gift of equity calculator takes the appraised value, the family price and the loan details you were quoted, and shows you the gift amount, the resulting loan and loan-to-value, and how much of the transfer sits above the annual exclusion figure you enter.

Arb Digital builds free calculators for people trying to understand a transaction before they are in the middle of it, and this is a transaction where understanding matters more than usual. A gift of equity touches two separate rulebooks at once — the lender's underwriting guidelines and the tax code — and neither of them is settled by arithmetic on a web page. What the arithmetic can do is show you the shape of the deal clearly enough that the conversations with the lender and the tax professional start from the right numbers.

What This Gift of Equity Calculator Does

It computes the gift itself as the difference between appraised value and contract price, then works forward. The gift plus any cash the buyer brings becomes the total down payment credit. The contract price minus that credit is the loan the buyer needs. That loan divided by the value the lender will use gives the loan-to-value ratio, which is the number that decides whether mortgage insurance is required and which loan products are open at all.

It also carries two figures that are easy to lose in a family deal. The first is the donor's adjusted cost basis, which generally carries over to the buyer rather than resetting to the price paid. The second is how much of the transfer sits above the annual per-recipient exclusion figure you type in, multiplied by the number of donors and recipients. That number is not a tax bill and this page does not say whether anything is reportable — it is a magnitude, so you know whether you are having a short conversation with a tax professional or a longer one.

Every figure in this tool is something you enter. There are no thresholds baked in, no assumed lender minimums, no market values. The exclusion amount in particular is indexed and changes from year to year, which is exactly why it is an input field rather than a constant in the code.

How to Use It

1. Enter the appraised market value. This must be the appraiser's figure, not a listing estimate and not what the family thinks the house is worth. Lenders measure the gift from the appraisal.
2. Enter the agreed sale price. The number that will be written into the purchase agreement and appear on the settlement statement.
3. Add the buyer's own cash and the lender's minimum down payment percentage. Take the minimum from your loan estimate or the programme guidelines your loan officer is quoting, not from a general article.
4. Enter the donor's adjusted cost basis and remaining mortgage balance. The basis comes from the donor's records and their tax professional; the payoff comes from the current mortgage statement.
5. Enter the annual exclusion figure for the year of the transfer, plus how many donors and recipients there are, then press Calculate. Every output updates together.

The Formula: How a Gift of Equity Is Calculated

The core relation is one subtraction. Gift of equity = appraised value − agreed sale price. If the house appraises at $400,000 and sells to the buyer's daughter for $340,000, the gift of equity is $60,000. If the contract price equals or exceeds the appraised value there is no gift of equity at all, and the calculator says so in words rather than showing a negative number.

From there the chain is straightforward. Total down payment credit = gift of equity + buyer's cash, so $60,000 plus $5,000 of the buyer's own money gives $65,000. Loan amount = sale price − total credit, which is $340,000 − $65,000 = $275,000. Loan-to-value is measured against the lower of the sale price and the appraised value, which in a gift-of-equity sale is always the sale price: $275,000 ÷ $340,000 = 80.88%. That last number decides whether the buyer clears an 80% threshold, and in this example they miss it by less than a percentage point — a gap of about $3,000 in the contract price.

The exclusion comparison is equally simple: excess = gift of equity − (exclusion × donors × recipients). With a $19,000 exclusion, two donors and one recipient, $38,000 is covered and $22,000 sits above it. Whether that excess is reportable, and on what form, is a question for the donor's tax professional. About Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return is the IRS page describing the return that gift reporting runs through, and it is the right starting point for that conversation.

The Lender Decides Whether a Gift of Equity Is Allowed at All

This is the part people discover late. A gift of equity is not something buyers are entitled to do; it is something a particular loan programme either permits or does not, on conditions the lender's underwriting guidelines set out. Those guidelines govern whether the transaction is eligible, who counts as an acceptable donor, what the gift letter has to say, whether the gift can count toward reserves as well as the down payment, and whether the property type qualifies.

Fannie Mae's B3-4.3-05, Gifts of Equity section of the Selling Guide illustrates how specific this gets: it treats a gift of equity as a credit from the seller's equity, allows it toward down payment and closing costs but not toward financial reserves, limits it to principal residence and second home purchases, and requires both a signed gift letter and a settlement statement showing the credit. Other investors, programmes and countries set different conditions. The guideline your own lender is underwriting to is the one that matters, and the way to find out what it says is to ask the loan officer before the contract is written.

One practical consequence: because the gift is measured from the appraisal, an appraisal that comes in lower than expected shrinks the gift and pushes the loan-to-value up, possibly past a threshold the buyer was counting on. If the deal is finely balanced, model it here at a couple of different appraised values before committing to a contract price.

Carryover Basis: The Consequence That Arrives Years Later

When property is received as a gift, the recipient does not generally get to treat what they paid as their cost basis. The donor's adjusted basis generally carries over. IRS Publication 551, Basis of Assets sets out the rules and the exceptions — including the different treatment when fair market value at the time of the gift is below the donor's basis, where the basis for figuring a gain and the basis for figuring a loss are not the same number.

Why it matters: a buyer who pays $340,000 for a house but inherits a $180,000 carryover basis is carrying a much larger built-in gain than the price suggests. If they later sell, the gain is measured from that lower basis, not from what they paid. Exclusions and reliefs may apply depending on the rules in force at the time, which is the territory of a tax professional and not of a calculator. The point of showing the number here is that it exists and should be written down at the time of the transfer, while the donor's records are still findable. Our capital gains tax calculator works through what a gain calculation looks like once a basis figure is settled.

How This Differs From the Other Tools on This Site

Three live calculators sit close to this one, and each answers a different question. The gift tax calculator handles cash and asset gifts against annual exclusions and the lifetime exemption; it has no property sale, no appraisal and no loan-to-value in it. This page starts from a property transaction and produces the financing consequences that the gift-tax page does not model at all.

The down payment calculator converts between a percentage and a dollar amount and estimates a monthly payment and mortgage insurance for a conventional purchase. It assumes the down payment is cash the buyer has. This page produces the down payment credit in the first place, out of a below-market family price. Run this one first, then take the credit figure into that one.

The home equity loan calculator is about borrowing against equity you keep. A gift of equity is about giving equity away inside a sale, which is the opposite direction of travel. And the cost per square foot calculator is useful for sanity-checking whether the agreed price is defensible against comparable properties before anyone signs.

What the Seller Actually Walks Away With

A gift of equity costs the seller real money at closing, and the arithmetic is easy to skip past when the transaction feels like a favour rather than a sale. Net proceeds are the sale price minus the mortgage payoff minus the costs of sale — and the sale price is already the reduced one. In the worked example, $340,000 less a $150,000 payoff leaves $190,000 before any costs of sale, where a market-price sale at $400,000 would have left $250,000. The calculator shows the payoff-adjusted figure so the donor sees that consequence next to the gift figure rather than on a settlement statement.

There is a hard floor here worth checking early: the sale price must at minimum cover the existing mortgage payoff and the costs of closing. A generous gift that pushes the contract price below the payoff does not work — the seller would have to bring cash to closing to clear their own loan. If your figures produce that situation, the calculator says so in plain words.

Common Misreadings of the Gift Amount

The most frequent one is measuring the gift from an estimate rather than an appraisal. Automated valuation figures from property portals are not appraisals, and a lender will not use them. Until the appraisal is back, every number here is provisional.

The second is assuming the gift somehow lets the loan be measured against the higher appraised value. It does not change what the buyer is buying — it changes how much of it is financed. Loan-to-value is still measured against the lower of price and appraised value.

The third is treating "no tax due now" as "nothing to do". Reporting and paying are different obligations, and which applies depends on figures that change annually and on the donor's own history of prior transfers. This page deliberately gives no verdict on either.

Common Mistakes to Avoid

• Writing the contract before asking the lender — whether a gift of equity is permitted at all is set by the loan programme's guidelines, and finding out afterwards is expensive.
• Using a portal estimate as the value — the gift is measured from the appraisal, and the two figures routinely differ by tens of thousands.
• Forgetting the mortgage payoff — the seller still has to clear their own loan out of a price that has already been reduced by the gift.
• Assuming the buyer's basis resets to the price paid — the donor's adjusted basis generally carries over, which affects the gain on any later sale.
• Typing last year's exclusion figure — the annual amount is indexed and changes, which is why this tool asks for it rather than assuming it.

Related Free Tools From Arb Digital

Pair this with the gift tax calculator for the cash-gift side, the down payment calculator for the monthly payment that follows from the loan amount, the capital gains tax calculator for the carryover-basis consequence, and the cost per square foot calculator to test whether the family price is defensible against comparable sales. The full free online tools hub has the rest of the property and finance set.

Frequently Asked Questions

This calculator is an arithmetic aid only. It gives no tax advice, states no threshold as current, and offers no view on whether any transfer is reportable or whether any lender will approve it. A gift of equity has both tax and lending consequences: consult a qualified tax professional about the reporting and basis questions, and your lender about whether the transaction is permitted under the guidelines they are underwriting to.