Gift of Equity Calculator

Fair Market Value of Property ($):

Agreed-Upon Sale Price ($):

Buyer's Cash Contribution (excluding gift) ($):

Calculation Results

Gift of Equity Amount: $0.00

Total Down Payment (including gift): $0.00

Loan Amount Needed: $0.00

Loan-to-Value (LTV) based on Fair Market Value: 0.00%

Buyer's Initial Equity Percentage: 0.00%

function calculateGiftOfEquity() { var fairMarketValue = parseFloat(document.getElementById("fairMarketValue").value); var agreedSalePrice = parseFloat(document.getElementById("agreedSalePrice").value); var buyersCashContribution = parseFloat(document.getElementById("buyersCashContribution").value); if (isNaN(fairMarketValue) || isNaN(agreedSalePrice) || isNaN(buyersCashContribution) || fairMarketValue <= 0 || agreedSalePrice fairMarketValue) { document.getElementById("resultGiftOfEquity").innerText = "$0.00 (Sale price is not less than fair market value)"; var totalDownPaymentNoGift = buyersCashContribution; var loanAmountNoGift = agreedSalePrice – buyersCashContribution; if (loanAmountNoGift 0) ? (loanAmountNoGift / fairMarketValue) * 100 : 0; var initialEquityNoGift = (fairMarketValue > 0) ? (totalDownPaymentNoGift / fairMarketValue) * 100 : 0; document.getElementById("resultTotalDownPayment").innerText = "$" + totalDownPaymentNoGift.toFixed(2); document.getElementById("resultLoanAmount").innerText = "$" + loanAmountNoGift.toFixed(2); document.getElementById("resultLTVFairMarketValue").innerText = ltvNoGift.toFixed(2) + "%"; document.getElementById("resultInitialEquityPercentage").innerText = initialEquityNoGift.toFixed(2) + "%"; return; } var giftOfEquity = fairMarketValue – agreedSalePrice; var totalDownPayment = giftOfEquity + buyersCashContribution; var loanAmountNeeded = agreedSalePrice – buyersCashContribution; // Ensure loan amount is not negative if cash contribution exceeds sale price if (loanAmountNeeded 0) ? (loanAmountNeeded / fairMarketValue) * 100 : 0; var buyersInitialEquityPercentage = (fairMarketValue > 0) ? (totalDownPayment / fairMarketValue) * 100 : 0; document.getElementById("resultGiftOfEquity").innerText = "$" + giftOfEquity.toFixed(2); document.getElementById("resultTotalDownPayment").innerText = "$" + totalDownPayment.toFixed(2); document.getElementById("resultLoanAmount").innerText = "$" + loanAmountNeeded.toFixed(2); document.getElementById("resultLTVFairMarketValue").innerText = ltvFairMarketValue.toFixed(2) + "%"; document.getElementById("resultInitialEquityPercentage").innerText = buyersInitialEquityPercentage.toFixed(2) + "%"; } // Calculate on page load with default values window.onload = calculateGiftOfEquity;

Understanding the Gift of Equity

A "Gift of Equity" is a powerful tool often used in real estate transactions, particularly between family members. It occurs when a property is sold for less than its appraised fair market value, and the difference between the market value and the actual sale price is considered a gift from the seller to the buyer.

How Does a Gift of Equity Work?

Instead of the seller giving the buyer cash for a down payment, they effectively reduce the purchase price of the home. This reduction in price means the buyer immediately gains equity in the property at the time of purchase. For example, if a home is valued at $300,000 but sold to a family member for $250,000, the $50,000 difference is the gift of equity.

Key Benefits for Buyers:

Reduced Down Payment: The gift of equity can serve as all or part of the buyer's down payment, significantly lowering the amount of cash they need to bring to closing.
Lower Loan-to-Value (LTV): A larger effective down payment (due to the gift) can result in a lower LTV ratio, which can lead to better interest rates and potentially avoid Private Mortgage Insurance (PMI).
Immediate Equity: Buyers start with a substantial amount of equity in their home from day one.

Considerations for Sellers:

Gift Tax Implications: The gift of equity is subject to IRS gift tax rules. While most gifts fall under the annual exclusion amount (e.g., $18,000 per recipient in 2024) or the lifetime exemption, sellers should consult with a tax advisor.
Reduced Proceeds: The seller receives less cash from the sale than they would at fair market value.

Using the Gift of Equity Calculator:

Our calculator helps you understand the financial implications of a gift of equity transaction:

Fair Market Value of Property: Enter the appraised value of the home. This is what the property is truly worth on the open market.
Agreed-Upon Sale Price: Input the actual price at which the seller and buyer have agreed to transact. This will be less than the fair market value for a gift of equity to exist.
Buyer's Cash Contribution (excluding gift): Enter any additional cash the buyer is putting towards the down payment, separate from the gift of equity.

The calculator will then provide you with:

Gift of Equity Amount: The difference between the fair market value and the agreed-upon sale price.
Total Down Payment (including gift): The sum of the gift of equity and the buyer's cash contribution.
Loan Amount Needed: The amount the buyer will need to borrow from a lender.
Loan-to-Value (LTV) based on Fair Market Value: A critical metric for lenders, showing the loan amount relative to the property's true market value.
Buyer's Initial Equity Percentage: The percentage of the property's fair market value that the buyer owns outright at closing.

Example Scenario:

Let's say a home has a Fair Market Value of $300,000. The seller agrees to sell it to their child for $250,000. The child also contributes $20,000 in cash.

Gift of Equity: $300,000 – $250,000 = $50,000
Total Down Payment: $50,000 (gift) + $20,000 (cash) = $70,000
Loan Amount Needed: $250,000 (sale price) – $20,000 (cash) = $230,000
LTV (based on FMV): ($230,000 / $300,000) * 100 = 76.67%
Buyer's Initial Equity: ($70,000 / $300,000) * 100 = 23.33%

This calculator provides a clear picture of how a gift of equity can significantly benefit a buyer by reducing their loan amount and increasing their initial equity in the property.