Gift of equity is an effective strategy used by real estate investors to build wealth. It allows the donor to gift the equity in an investment property to the recipient. The recipient can then obtain financing to purchase the property based on the appraised value, not the lower gifted value. With proper planning, gift of equity minimizes taxes and facilitates the transfer of real estate assets. This powerful technique can significantly accelerate real estate portfolio growth when applied prudently.
Gift of equity enables wealth transfer at reduced gift tax cost
The donor can gift equity up to the annual exclusion amount ($16,000 for 2023) or lifetime exemption amount ($12.92 million for 2023) without incurring gift tax. As the gifted equity is excluded from taxable gifts, the donor avoids depletion of their lifetime exemption. This preserves the exemption for other estate planning needs. Additionally, with lower gifted value, the transfer tax implications are minimized if the donor retains partial interest.
Gift of equity boosts the recipient’s buying power
The recipient is only required to secure financing on the appraised value minus gifted equity. This results in lower down payment and loan amount, reducing the barrier to property acquisition. For instance, if a property is appraised at $500,000 and the donor gifts $100,000 equity, the recipient only needs to finance $400,000. This enhanced leverage empowers the recipient to acquire more real estate.
Gift of equity facilitates early inheritance of investment property
The donor can gift equity in income-producing real estate to the intended heirs before death. This initiates the inheritance process and provides the heirs with rental income. With prudent management, the heirs can use the cashflows to cover mortgage payments and even fund further real estate purchases. Early inheritance of property allows the heirs to build equity, establish creditworthiness, and potentially accelerate their real estate investing endeavors.
Gift of equity requires proper documentation for lender
For the recipient to obtain financing based on appraised value, the gift of equity must be properly documented. The donor provides a gift letter detailing the gifted amount and transfers title to the recipient. The appraisal and gift documentation establish basis for lender to approve loan on appraised value. Legal counsel should review the gift letter and closing procedures to ensure compliance.
When used strategically, gift of equity is a powerful technique to transfer real estate wealth between generations. It minimizes gift tax, provides heirs with property ownership and cashflow, and enhances purchasing power for further acquisitions. However, proper appraisal, documentation and legal counsel are critical for successful execution.