A gift of equity lets parents sell their home to a child for less than it is worth, with the difference treated as a gift that counts toward the child’s down payment. It can turn a family home into the child’s first home without the parents writing a check, and in Pennsylvania, a sale between parent and child is generally excluded from realty transfer tax.
Below: how it works, what lenders and the IRS require, and the details that make it go smoothly.
How it works
Suppose parents own a home in Abington worth $600,000. They agree to sell it to their daughter for $480,000.
| Amount | |
|---|---|
| Market value (supported by the appraisal) | $600,000 |
| Price the daughter pays | $480,000 |
| Gift of equity | $120,000 |
| The daughter’s mortgage | $480,000, or 80 percent of value |
The $120,000 of equity serves as her 20 percent down payment, so she can avoid private mortgage insurance without bringing that cash herself. The agreement of sale shows the full $600,000 price, and the settlement statement shows the $120,000 gift of equity as a credit.
What lenders require
Under Fannie Mae’s rules:
- The seller giving the equity must be an acceptable donor, such as a parent or other relative.
- The home must be the buyer’s primary residence or a second home.
- The gift of equity can cover all or part of the down payment and closing costs, but not cash reserves.
- The lender needs a signed gift letter and a settlement statement that shows the gift of equity.
FHA loans allow a gift of equity only between family members. FHA usually caps family sales at 85 percent loan-to-value, but makes an exception when the child is buying a family member’s primary residence.
Because the value drives everything, the lender’s appraisal matters, and if the parents will file a gift tax return, their accountant may want an independent appraisal as well. If it comes in low, the gift shrinks and the down payment math changes.
The tax side for the parents
It is a gift. The IRS treats a sale for less than market value as a partial gift. In 2026, each parent can give each child $19,000 without a gift tax return, or $38,000 together. In the example, the parents would file gift tax returns for the $120,000, with $38,000 covered by the annual exclusion and $82,000 reducing their lifetime exemption, which is $15 million per person in 2026. In practice, no tax is due for most families.
Their gain is measured on what they actually receive. The parents’ taxable gain is based on the $480,000 they receive, not the $600,000 value, and the home sale exclusion of up to $250,000, or $500,000 for a married couple, can apply if they lived there two of the last five years.
The child’s starting basis follows special rules for a sale that is part gift and part purchase. Ask your accountant to document it now, because it will matter when the child sells someday.
Pennsylvania’s transfer tax exclusion
Pennsylvania’s realty transfer tax is usually 2 percent of the price, split between buyer and seller. But the law excludes transfers between parent and child, and between grandparents and grandchildren, and the exclusion is not limited to gifts. A sale from parents to their child, at full price or with a gift of equity, is generally excluded. On a $600,000 home, that is about $12,000 saved.
Two cautions:
- If the child resells the home within one year, the resale is taxed as if the parents were selling.
- An estate is not treated as a family member, so a sale from a parent’s estate after death does not qualify.
Properties in Philadelphia have their own local tax rules, so confirm the treatment with the title company. The Pennsylvania realty transfer tax guide has the full picture.
Do you need a real estate agent?
You do not need to list the home publicly. You do need a fair, documented price, a proper agreement of sale, and a settlement handled by a title company. A family sale also benefits from someone who can share recent comparable sales with the lender’s appraiser, give the family’s accountant the market data behind the price, and keep everyone on schedule.
Where Karen fits
Karen Langsfeld is a REALTOR® and Pricing Strategy Advisor (P.S.A.) with Berkshire Hathaway HomeServices Fox & Roach. For a family sale, she prepares a comparative market analysis that helps the family choose a fair price, prepares the agreement of sale, and coordinates with the lender, the title company, and the family’s attorney and accountant. For other ways to help a child buy, see the guides to gifting a down payment, family loans, and helping your children buy a home when mortgage rates are high, or learn more about helping your family buy or sell a home.
Contact Karen at (215) 495-2914 or through the contact page.
This guide is general information, not legal, tax, or lending advice. Confirm your plan with your attorney, accountant, and lender. Sources: Fannie Mae Selling Guide B3-4.3-04 and B3-4.3-05; HUD Handbook 4000.1; IRS Revenue Procedure 2025-32 and Form 709 instructions; Internal Revenue Code section 121; 72 P.S. section 8102-C.3 and 61 Pa. Code section 91.193.