Gift of Equity in California: Selling Your Home to Your Child Below Market Value

A gift of equity is the difference between what a home is worth and the lower price a family member pays for it. In California, a parent can sell a home to a child below market value, and most lenders will count that discount as the child's down payment. It is one of the most practical ways to help a child buy the family home without writing a check.

How a gift of equity works

Suppose a home appraises at $1.5 million and the parents want their daughter to pay $1.2 million. The $300,000 difference is the gift of equity. The way this is documented matters. The purchase agreement states the full $1.5 million market value as the price and shows the $300,000 gift of equity as a credit from the parents toward it. The daughter borrows $1.2 million, which is 80% of the $1.5 million price, so the lender sees a 20% down payment that came from her parents in the form of equity instead of cash. The parents walk away with roughly $1.2 million before closing costs and other adjustments.

The structure is not optional. Most lenders set the loan-to-value ratio using the lower of the contract price or the appraised value. If the contract simply said $1.2 million, the lender would treat it as a $1.2 million purchase with no down payment at all, and the appraisal would not fix that. Conventional loans sold to Fannie Mae and Freddie Mac allow a gift of equity documented this way. Jumbo and portfolio lenders, which handle most Bay Area loans of this size, set their own rules and some restrict or disallow gifts of equity, so the lender must approve the structure before the family commits to a price.

The daughter needs a loan for $1.2 million and money for closing costs. She does not need to save a six-figure down payment first, which in the Bay Area is often the real obstacle.

What lenders require

Rules differ by loan program, so the buyer should speak with a loan officer before the price is set. In general, lenders expect:

• A qualifying relationship. The gift must come from a relative. Parents to children is the standard case.
• An appraisal. The lender's appraisal establishes the market value. The gift is the gap between that value and what the child actually pays. If the appraisal comes in below the family's number, the gift shrinks with it.
• A signed gift letter. The parents state the amount and confirm that it is a gift with no repayment expected.
• A contract that spells it out. The purchase agreement should state the full market-value price and show the gift of equity as a credit from the seller, and the same gift appears on the closing statement.
• A buyer who qualifies. Income, credit, and debt ratios are reviewed as in any purchase. Because the sale is between relatives, the lender may ask extra questions to confirm that it is a genuine sale.

The tax side for parents

Gift tax reporting

In 2026, each parent can give each recipient $19,000 without any reporting. A $300,000 gift of equity exceeds that, so the parents file a federal gift tax return (Form 709). Filing does not mean paying. The gift is subtracted from each parent's lifetime exemption, which is $15 million per person in 2026. California has no gift tax.

Capital gains

The parents are still selling a home, and their gain is measured on what they actually receive, not the market-value figure on the contract. If they bought for $300,000 and receive $1.2 million, the gain is $900,000. A married couple who lived there for two of the past five years can exclude $500,000 of it. The rest is taxable, so the parents should run the numbers with a CPA before choosing the price.

The tax side for the child

The child's basis is generally the amount actually paid, $1.2 million in this example, and not the $1.5 million market value shown on the contract. The $300,000 gift does not increase it. If the child later sells for $1.5 million, the gain is measured from $1.2 million. That is still far better than receiving the whole home as a gift and taking over the parents' $300,000 basis. Our article on whether to sell, gift, or leave the home as an inheritance compares those outcomes.

Property tax under Prop 19

A discounted price does not change the Prop 19 analysis. If the home was the parents' primary residence and the child moves in as their own primary residence within a year and files the claim, the child can keep the parents' tax base, subject to the value limit of roughly $1 million over the assessed value. If the child will not live there, the home is reassessed at market value regardless of the price paid. Our Prop 19 guide covers the calculation and deadlines.

Common mistakes

• Setting the price before talking to the lender. The appraisal, not the family's estimate, determines the size of the gift, and the lender has to approve how the gift is written into the contract.
• Skipping disclosures and inspections. A lender and a title company are involved, and the child deserves to know the condition of the home. Treat it as a real sale.
• Forgetting the siblings. A $300,000 gift to one child is something most parents want to address in their estate plan.
• Missing Form 709. The return is due the April after the year of the gift, even when no tax is owed.
• Calling a private loan a gift. If the parents expect to be repaid, it is seller financing, and the lender must be told.

The steps, in order

1. The child gets pre-approved and confirms the loan program allows a gift of equity.
2. The parents review the gain and the gift with their CPA.
3. The family agrees on the price and the gift, and escrow opens.
4. The parents complete and deliver the disclosures, the inspections are done, and the lender's appraisal confirms the market value.
5. The family signs a purchase agreement that states the market-value price and the gift of equity as a credit.
6. The parents sign the gift letter, the loan funds, and the sale closes.
7. The child files the Prop 19 claim, and the parents file Form 709 the following spring.

Since the buyer is already found, there is no need for a full-service agent. On a $1.2 million sale, even a 2.5% listing-side commission would be $30,000. Our fee is a flat $6,000.

Common questions

What is a gift of equity?

It is the difference between a home's market value and the lower price a family member pays. Lenders can treat that difference as the buyer's down payment.

Can a gift of equity cover the whole down payment?

Often, yes. Many loan programs allow a gift of equity from a relative to cover the full down payment, but the rules vary by program, so confirm with the lender first.

Do parents pay gift tax on a gift of equity?

Usually not. A gift above $19,000 per recipient in 2026 must be reported on Form 709, but tax is owed only after a parent has used the lifetime exemption, which is $15 million per person in 2026.

Does selling below market value affect Prop 19?

No. The parent-child exclusion depends on the home being the parent's primary residence and becoming the child's primary residence within one year, not on the sale price.

This article is general information, not tax or legal advice. Tax figures are current as of the publication date and change over time. Talk to a CPA or attorney about your own situation.