A gift of equity affects the seller in four concrete ways: you take home less cash from the sale, you almost always have to file IRS Form 709 to report the gift, you still owe any capital gains tax the sale would normally trigger, and the gift can block Medicaid long-term care eligibility for up to five years. Actual gift tax is rare because of the $15 million lifetime exemption for 2026, but the paperwork and the other consequences apply regardless.
Less Cash at Closing
The equity you gift never reaches you. It shows up as a credit on the buyer’s side of the settlement statement instead of a check to you.1Fannie Mae. B3-4.3-05, Gifts of Equity Your remaining mortgage balance, property taxes owed, agent commissions, title fees, and any transfer taxes still come out of what’s left.
Say the home appraises at $400,000 and you owe $200,000 on the mortgage. A full-price sale would leave you roughly $200,000 before closing costs. If you instead sell to a family member for $300,000 and gift $100,000 in equity, the settlement agent still deducts the $200,000 payoff and standard closing costs from the $300,000 sale price. Your net proceeds drop by the full amount of the gift.
Filing a Gift Tax Return
The IRS treats a gift of equity like any other gift. For 2026, the annual gift tax exclusion is $19,000 per recipient.2Internal Revenue Service. What’s New — Estate and Gift Tax If your gift to any one person exceeds that in a calendar year, you have to file Form 709 the following tax season.3Internal Revenue Service. Instructions for Form 709 (2025)
Real estate gifts of equity almost always exceed $19,000, so plan on filing. Failing to file can trigger federal penalties even when no tax is owed.3Internal Revenue Service. Instructions for Form 709 (2025)
Filing does not mean paying. The amount above $19,000 counts against your lifetime gift and estate tax exemption, which is $15,000,000 per individual for 2026 after an increase Congress enacted in mid-2025.2Internal Revenue Service. What’s New — Estate and Gift Tax You would need to have given away more than $15 million in your lifetime before owing actual federal gift tax. For nearly every home sale, the tax owed is zero. The form is informational — it tracks how much of your lifetime exemption you’ve used, which matters for future estate tax calculations.
Splitting the Gift With a Spouse
If you’re married, federal law lets you and your spouse elect to treat the gift as made half by each of you.4Office of the Law Revision Counsel. 26 U.S. Code 2513 – Gift by Husband or Wife to Third Party That doubles the effective annual exclusion to $38,000 per recipient. A married couple gifting exactly $38,000 in equity to a child can split the gift and skip Form 709 entirely.
For larger gifts, splitting still cuts each spouse’s use of the lifetime exemption in half. Both spouses have to consent to splitting on their Form 709 returns, and once elected, the split applies to every gift either spouse makes during that calendar year.3Internal Revenue Service. Instructions for Form 709 (2025)
Capital Gains Still Apply
A gift of equity does not erase capital gains tax. Your taxable gain is still the sale price minus your adjusted basis (generally what you paid plus the cost of permanent improvements). If you used the home as a primary residence for at least two of the five years before the sale, you can exclude up to $250,000 of that gain, or up to $500,000 if married filing jointly.5Office of the Law Revision Counsel. 26 U.S.C. 121 – Exclusion of Gain From Sale of Principal Residence The gift of equity itself does not change this exclusion.
Gain above the exclusion is taxed at long-term capital gains rates of 0%, 15%, or 20% based on your taxable income. For 2026, single filers pay 0% on gains if taxable income stays below $49,450, with the 20% rate starting above $545,500. For joint filers, the 0% threshold is $98,900 and the 20% rate begins above $613,700.6Internal Revenue Service. Revenue Procedure 2025-32 – Tax Inflation Adjustments for Tax Year 2026 High-income sellers may also owe the net investment income tax.
One boundary worth knowing: a gift of equity cannot create a deductible loss. If your home has fallen in value since you bought it, selling below market to a relative does not generate a capital loss you can use against other income. Losses on personal-use property are nondeductible.7Internal Revenue Service. What if I Sell My Home for a Loss?
Medicaid Look-Back
If long-term care is anywhere on your horizon, this consequence matters as much as the tax side. Federal law requires states to review all asset transfers made within 60 months before a Medicaid long-term care application.8Office of the Law Revision Counsel. 42 U.S. Code 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets Selling a home below fair market value counts as a transfer for less than full value. The gap between appraised value and sale price is the amount Medicaid treats as uncompensated.
If you apply for Medicaid-funded nursing home or home care within five years of the gift, the state divides that uncompensated amount by the average monthly cost of private nursing home care in your state. The result is a penalty period, measured in months, during which you are ineligible for Medicaid long-term care benefits.8Office of the Law Revision Counsel. 42 U.S. Code 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets A $100,000 gift of equity in a state with an $8,000 average monthly private nursing home rate produces roughly 12.5 months of ineligibility. During the penalty, you or your family pay the full cost of care. There is no cap on the length of the penalty period, so larger gifts create longer gaps in coverage.
What the Lender Requires From You
The buyer’s lender will require a professional appraisal from a licensed third party to confirm fair market value and verify that the gifted equity actually exists. You will also need to sign a formal gift letter naming the donor and recipient, identifying the property, stating the dollar amount of the equity gift, and confirming that no repayment is expected. The appraisal and gift letter both go into the loan file.1Fannie Mae. B3-4.3-05, Gifts of Equity The sales contract itself has to show both the agreed sale price and the gift of equity as a separate line item.
After closing, your remaining obligation is Form 709 with your federal return the following year if the gift exceeded $19,000 to any single recipient (or $38,000 if you and your spouse elected to split).3Internal Revenue Service. Instructions for Form 709 (2025)