Real Estate Sales Contract with Gift of Equity: Everything You Need to Know

If you`re planning to sell your home to a family member or a friend, you may want to consider a real estate sales contract with a gift of equity. This type of transaction can help the buyer qualify for financing and save money on the down payment, while allowing you to transfer ownership of the property and potentially reduce your tax liability.

What is a gift of equity?

A gift of equity is a portion of the home`s value that is transferred from the seller to the buyer as a gift, rather than being paid for with cash or financed through a mortgage. This can reduce the amount of money the buyer needs to borrow and the associated interest payments, while also providing the seller with tax benefits.

For example, suppose your home is worth $300,000, and you sell it to your son for $250,000. You can gift him $50,000 in equity, which will reduce his down payment and the size of his mortgage. This could save him thousands of dollars in interest over the life of the loan. Meanwhile, you can claim a tax deduction for the amount of the gift (up to the annual exclusion limit of $15,000 per recipient for 2021), which can reduce your taxable income and potentially lower your tax bill.

How does a real estate sales contract with a gift of equity work?

A real estate sales contract with a gift of equity is a legal document that outlines the terms and conditions of the transaction between the seller and the buyer. It typically includes:

– The purchase price: This is the amount that the buyer will pay for the property, which may be less than the home`s appraised value.

– The gift of equity: This is the amount of the home`s value that the seller is gifting to the buyer as a down payment or to reduce the mortgage balance.

– The financing: This outlines the terms of the buyer`s mortgage, including the interest rate, the length of the loan, and the monthly payment.

– The closing date: This is the date when the sale will be finalized, and ownership of the property will transfer from the seller to the buyer.

– The contingencies: These are conditions that must be met before the sale can be completed, such as the buyer obtaining financing or the seller making any necessary repairs to the property.

Once the contract is signed, the buyer will typically apply for a mortgage using the gift of equity as part of the down payment. The lender will need to verify that the gift is a legitimate transfer of equity and that there are no strings attached (i.e., the seller cannot require the buyer to repay the gift, or to do anything in exchange for the gift). The buyer may also need to provide documentation showing that they have the funds to cover any remaining down payment or closing costs.

Benefits and risks of a real estate sales contract with a gift of equity

The main benefit of a real estate sales contract with a gift of equity is that it can make it easier for the buyer to qualify for financing and save money on the down payment and interest. It can also provide tax advantages for the seller, who may be able to claim a deduction for the gift of equity.

However, there are also risks associated with this type of transaction. For example, if the buyer defaults on the mortgage, the seller may not be able to recover the full amount of the gift of equity. There is also the risk that the value of the home will decline, leaving the buyer with negative equity and making it difficult to sell or refinance the property.

To minimize these risks, it`s important to work with an experienced real estate attorney or agent who can help you draft a comprehensive sales contract and ensure that all parties understand their rights and obligations. You should also be prepared to provide documentation and to work closely with the buyer`s lender to ensure a smooth and successful transaction.

In conclusion

A real estate sales contract with a gift of equity can be an effective way to transfer ownership of a property while providing financial benefits for both the buyer and the seller. However, it`s important to understand the risks and to take steps to protect yourself and your investment. With careful planning and expert guidance, you can make a gift of equity transaction work for you.