How to Use a Gift of Equity for Wealth Transfer Instead of a Family Loan

You’ve built equity in your home, your children are struggling to buy one, and your instinct is to help. Maybe you’ve considered a loan or simply writing a check. But there's a smarter, cleaner way to support the next generation without upending your estate plan or igniting sibling tension: it’s called a gift of equity for wealth transfer and it may be one of the most underutilized strategies for families with real estate wealth. 

The Hidden Cost of Helping the Wrong Way 

Too many well-meaning parents rely on cash gifts or family loans to help their kids become homeowners. While it may feel generous, it can result in: 

• IRS reporting requirements and gift tax filings every single year 

• Imputed income issues if you loan money at below-market interest (the IRS currently assumes 4.07% as of June 2025) 

• Unequal distributions that cause resentment among siblings 

  
  

What looks like a simple $100,000 loan can morph into a compliance nightmare and sometimes, a family rift. 

Why Conventional Wisdom Falls Short 

The “Bank of Mom and Dad” isn’t just emotionally loaded - it’s inefficient. If you make a loan and don’t charge interest, the IRS treats it as a gift. If you gift cash, you may need to file Form 709 and risk unintentionally favoring one child over the others. And if you don’t talk to your estate planner and financial advisor, your well-meaning help today may unravel the legacy you intended to leave behind. 

What Are the Tax Implications of a Gift of Equity? 

A gift of equity is the difference between your home’s appraised value and the discounted price you sell it for to your child. For example, if your home appraises at $800,000 and you sell it to your daughter for $640,000, you’ve given her $160,000 in equity and the IRS sees that as a gift.

You’ll need to file a gift tax return, but it typically just reduces your lifetime exemption (currently $13.99 million per person in 2025). However, there’s a capital gains trap: your child inherits your original cost basis. If you bought the home for $200,000, and she sells it one day for $900,000, her taxable gain will be $700,000. That’s why understanding how to transfer property to family without triggering capital gains issues is critical. 

Why a Gift of Equity for Wealth Transfer Beats Cash or Loans

Helping a child buy your home using a gift of equity offers distinct advantages over family loans or large cash transfers. It can: 

• Eliminate the need for private mortgage insurance (PMI) by instantly establishing 20% equity 

• Bypass annual gift filings and ongoing IRS scrutiny 

• Create a living wealth transfer you can witness while still preserving your financial independence 

  
  

If you're asking "What's the best way to transfer real estate to a child?" - this is often it. 

3 Keys to Using a Gift of Equity Wisely

1. Document the Gift Properly Use a formal gift letter for the mortgage lender, and ensure a third-party appraisal is completed to validate the discount. 

2. File IRS Form 709 Even though you likely won’t owe tax, you’ll need to report the gift. Filing correctly now avoids problems down the road. 

3. Equalize the Estate If you have more than one child, be proactive. Whether through life insurance, trusts, or other assets, make a plan to ensure fairness across the board. 

The Sooner You Plan, the More Options You Have 

A gift of equity for wealth transfer isn't just a mortgage trick - it’s a living expression of legacy. But without careful planning, it can backfire, creating resentment or tax exposure that impacts your family long after you're gone. The key is understanding how real estate fits into your larger estate plan and acting while you still have options.

Ready to protect your legacy with confidence? 

Let’s start a conversation. Book a free initial call and learn how we can help you protect what you’ve built and secure a stronger financial future for your loved ones.