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How to Use a Gift of Equity in Ohio FSBO Transactions

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Matthew A. Schwartz

Ohio Real Estate Attorney

A Gift of Equity in a property allows the future owners and buyers of the property to leverage their newfound equity in the property as a down payment on the loan to finance the property and to avoid Private Mortgage Insurance (PMI) potentially.

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FSBO Sales Directed at Family Members Can include a Gift of Equity

While saving on realtor fees is an excellent benefit of choosing to proceed with For Sale By Owner, some of the most valuable advice we can offer involves structuring a deal with a family member, renter, or someone with whom you have a close relationship.

During the transaction to sell the property, you may decide to price the property BELOW the actual appraised value of the property and that creates something called a Gift of Equity.

A Gift of Equity in a property allows the future owners and buyers of the property to leverage their newfound equity in the property as a down payment on the loan to finance the property and to avoid Private Mortgage Insurance (PMI) potentially. The Gift of Equity is an actual gift to the buyer, it may not be a “loan” and it may not be cash. These factors are normally certified in a Gift of Equity Letter.

4 Key Components to a Gift of Equity

  1. A gift of equity involves the sale of a residential property for less than the appraised amount with no exchange of cash (or anything else of value) to offset the difference between the established market value and the purchase price.
  2. A gift of equity is normally conducted between family members although not strictly forbidden between a seller and a buyer with a close relationship.
  3. Lenders will require that the buyer is qualified for the mortgage they take on the selling price in order for the Lender to accept the Gift of Equity as a down payment on the mortgage.
  4. Gifts of Equity are quantified through a Gift of Equity Letter.  While the letter is not specifically required to be notarized, the use of a notary is recommended.

Potential Benefits for Gifts of Equity in Ohio

  1. The buyer may be able to significantly lower or even eliminate a downpayment on the purchase of a family-owned property. With required down payments ranging from 5% to 20%, the Gift of Equity can resolve situations where buyers may struggle to establish the up-front money required to complete a purchase.
  2. Gifts of Equity are conducted using an attorney to help draft the Gift of Equity Letter and manage the selling process from Affidavits of Title through the Mortgage Agreement with the lender.
  3. Family members can pass generational wealth on to their children or other close relatives by passing equity from their home to them during the sale of the property.
  4. Ohio has no Estate Tax or Gift Tax so sellers and buyers may be able to avoid a tax situation associated with the Capital Gains on the property.

Potential Drawbacks to Gifts of Equity in Ohio

  1. While there is no firm Gift Tax in the State of Ohio, a large gift from an estate might trigger another tax.  Consult an attorney or tax accountant to understand the full picture and potential tax implications.
  2. A gift of equity could actually lower the cost of the house being purchased by the buyer as any cost associated with improving the property is transferred to the buyer as equity.  But that can increase the capital gains value when the new owner sells the property potentially resulting in tax offsets.
  3. A Gift of Equity does not cover the closing costs on a loan or filing fees for titles and deeds.  A Gift of Equity is also filed using an attorney and legal fees may apply. 

What is Required for a Gift of Equity in Ohio?

In Ohio, a Gift of Equity Letter is required, and while notarization is not required it is strongly encouraged.  The letter contains the following:

  1. The property seller must pay to have a professional appraisal completed on the property to establish the market value
  2. The current market value of the property from the appraisal is stipulated in the Gift of Equity Letter.
  3. The Gift of Equity Letter must include the price at which the property will be sold to the buyer and the dollar value of the Equity being transferred

The Gift of Equity Letter is part of the closing process and is presented at the time of closing and to potential lenders as loan vehicles are created for the new buyer of the property. The buyer MUST qualify for a loan to receive the equity.

Gift of Equity and Internal Revenue Service (IRS) Guidelines

While a Gift of Equity may not have tax consequences in the State of Ohio, it may have consequences with the Internal Revenue Service.  In 2021, the IRS cap on gifts from a married couple to an individual is set at $32,000 a year and $16,000 from an individual to another individual.  Capital Gains tax may apply on the difference between the Market Appraisal and selling price less the Gift cap.  Consult a tax advisor or an attorney to find out more.

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The information contained on this website is presented for informational and marketing purposes only and is not to be understood as legal advice. You should consult an attorney for advice respecting your individual needs. The Law Office of Matthew A. Schwartz looks forward to speaking with you about your particular needs. Please note, however, that the mere act of contacting our firm does not create an attorney-client relationship. As a result, you should never send any confidential information to our office until a Representation Agreement has been signed by both you and The Law Office of Matthew A. Schwartz.