When buying a property, many buyers may be interested in the option of an agreement of sale with gift of equity. This type of transaction can be particularly attractive for those who have a family member or friend who is willing to gift them the equity in a property as part of the sale.
What is a Gift of Equity?
A gift of equity is exactly as it sounds. It’s when the seller of a property gifts a portion of their equity to the buyer. For example, if the property is worth $300,000, and the seller has $100,000 in equity, they can gift the buyer $50,000 in equity, reducing the purchase price to $250,000. This can be an attractive option for both parties, as it allows the buyer to purchase the property at a discounted price, while also providing a tax benefit to the seller.
What is an Agreement of Sale?
An agreement of sale is a legal contract that sets out the terms and conditions of a property sale. It outlines the purchase price, payment terms, and any other terms and conditions agreed upon by both parties. The agreement of sale is typically used in situations where the buyer does not have the full purchase price available at the time of the sale, such as when a mortgage or other financing is needed.
How Does an Agreement of Sale with a Gift of Equity Work?
In an agreement of sale with a gift of equity, the buyer and seller agree on the purchase price of the property, which is typically less than the property’s appraised value. The gift of equity is then applied to the purchase price, reducing the amount the buyer needs to borrow.
For example, if the property is appraised at $300,000, and the agreed-upon purchase price is $250,000, the seller can gift the buyer $50,000 in equity. This reduces the amount the buyer needs to borrow to $200,000. The buyer can then obtain a mortgage for the remaining $200,000.
Benefits of an Agreement of Sale with a Gift of Equity
There are a number of benefits to an agreement of sale with a gift of equity for both the buyer and seller. For the buyer, it can make the purchase more affordable, as they do not need to borrow as much money. This can also make it easier to obtain financing, as the loan-to-value ratio is lower.
For the seller, gifting equity can provide tax benefits. In most cases, the gift will be subject to gift tax rules. However, if the amount of the gift is below the annual gift tax exclusion amount ($15,000 for 2021), the seller will not owe any gift tax. Additionally, if the seller’s estate is large enough to be subject to estate tax, gifting equity can help reduce the estate’s taxable value.
An agreement of sale with a gift of equity can be a win-win situation for both the buyer and seller. It allows the buyer to purchase the property at a discounted price, while also reducing the amount they need to borrow. For the seller, gifting equity can provide tax benefits while also making the property more attractive to potential buyers. As with any real estate transaction, it’s important to consult with a qualified professional before entering into an agreement of sale with a gift of equity to ensure all legal and financial considerations are properly addressed.