How a Gift of Equity Works When Selling to Family in Texas

What is a gift of equity in Texas real estate?

A gift of equity is the difference between a home's appraised market value and the price a seller accepts from a family member. That difference is documented at closing as the buyer's down payment, so no cash changes hands. In Texas, neither the seller nor the buyer owes state gift tax, making it one of the cleanest ways to transfer homeownership within a family.

By Paul Blair | October 11, 2026

If your parents want to sell you the house you grew up in, or you want to sell your home to your adult child without making them come up with a six-figure down payment, a gift of equity may be exactly what you're looking for.

A September 2026 feature on 247WallSt told the story of a family that sold their daughter the house for $250,000 less than its appraised value. The discount was legally a gift. Her mortgage was half the size it would have been at market price. Nobody owed the IRS a dollar. That kind of arrangement happens in Dallas-Fort Worth more often than most people realize, especially in higher-equity markets like the Park Cities, Preston Hollow, and Plano, where parents are sitting on homes worth two or three times what they paid.

Here's how it actually works in Texas.

How the Numbers Work

A gift of equity is the difference between what a home appraises for and the price the family agrees to accept at closing. That gap gets documented on the settlement statement as "gift of equity" credited toward the buyer's down payment.

Here's a simple example: the home appraises at $500,000. The parents agree to sell for $420,000. The $80,000 difference is the gift of equity. The buyer's lender sees an $80,000 down payment without the buyer having to bring $80,000 to the table. The buyer only needs to finance $420,000.

A few things to know before agreeing on a price:

• Get the appraisal first. The gift amount is calculated from the appraised value, not an estimate. Agree on the price after you have the appraisal, not before.
• It shows up on the settlement statement. The title company documents the gift as a credit on the Closing Disclosure.
• No cash changes hands. The seller receives the agreed sale price. The gift is entirely in the equity discount.

What Lenders Require

Lenders treat a gift of equity transaction as a non-arm's-length sale, which means more documentation and extra underwriting scrutiny. Plan for a longer process than a typical home sale.

Conventional loans allow gifts of equity on primary residences and second homes. Investment properties are not eligible.

FHA loans are more flexible. Gifted equity can cover both the down payment and closing costs, and FHA uses a broader definition of "family member" than conventional programs.

The two things every lender requires:

1. An independent appraisal. No exceptions. The lender needs to confirm true market value so the gift amount can be calculated accurately.
2. A gift of equity letter. This letter must state clearly that the equity is a gift and is non-repayable under any circumstances. Lenders have specific formats, and your loan officer will provide a template. The letter needs to be signed by both parties.

Because this is a non-arm's-length transaction, the buyer's lender may require additional documentation: proof of relationship, a longer paper trail on the property, and sometimes a second review. Build extra time into your timeline.

Tax Considerations in Texas

Texas has no state gift tax and no state income tax, which simplifies the federal math considerably.

For the seller: The Section 121 exclusion protects most sellers on capital gains. If you've lived in the home for two of the last five years, you can exclude up to $250,000 in gains (or $500,000 if married filing jointly) from federal taxes. Most family home sales in Texas fall comfortably within that exclusion.

Gift tax reporting: In 2026, the annual gift tax exclusion is $19,000 per recipient. If the gift of equity exceeds $19,000, the seller needs to file IRS Form 709. Filing doesn't mean paying tax. The excess applies to the lifetime exclusion, which is $15 million in 2026. For most families, no tax is actually owed. Consult a CPA to confirm your specific situation.

Buyer's cost basis: This is the one area that catches people off guard. The buyer inherits the seller's original cost basis in the gifted portion of equity, not a stepped-up basis. If the buyer sells the home years later, their capital gains calculation starts from what the parents originally paid for the property, not the sale price. This matters most in high-appreciation markets like the Park Cities and Preston Hollow, where a home bought in 2005 might be worth four times the original purchase price today.

One important watch item: the Medicaid look-back window is five years. If the seller is elderly and may need long-term care within that window, a below-market family sale can create complications for Medicaid eligibility. Talk to an elder law attorney before closing if this applies to your situation.

For more on what equity means in Texas, including HELOC rules and homestead protections, see our guide to Texas home equity loan rules in Dallas.

The Deed, Title, and Why You Both Need Counsel

Texas is a title company state. The warranty deed transfers ownership, and both a vendor's lien and a deed of trust are created to secure the lender's interest. Both must be addressed properly at closing.

Because it's a non-arm's-length transaction, both parties should have their own legal counsel. The cost of having an attorney review the purchase agreement and gift letter is worth it, especially when family relationships are involved.

One thing that trips people up: gifts of equity only work for primary residences and second homes under conventional financing. If the buyer plans to rent the property out, the structure won't work with standard financing. For more on how lenders draw that line, see second home vs. investment property in Texas.

If you're trying to help a family member into homeownership without requiring them to save a large down payment, a gift of equity is one of the most efficient tools available in Texas, where no state gift or income tax makes the federal math as clean as it gets.

Thinking through the numbers for your own property? A market analysis shows you exactly what your home is worth today and what a gift of equity would look like in practice. Start with a free home value estimate, or reach out directly if you'd like to walk through the specifics together.

Frequently Asked Questions

Can a gift of equity be used as a down payment in Texas?

Yes. The gifted equity is documented at closing as the buyer's down payment on the Closing Disclosure. With an FHA loan, it can also cover closing costs. No cash needs to change hands for the buyer to meet down payment requirements.

Do you pay taxes on a gift of equity in Texas?

Texas has no state gift tax, so only federal rules apply. The seller may need to file IRS Form 709 if the gift exceeds the 2026 annual exclusion of $19,000, but most families won't owe actual tax because the lifetime exclusion is $15 million. The seller's capital gains are typically protected by the Section 121 primary residence exclusion.

What does a gift of equity letter need to say?

The letter must identify the property, state the relationship between the parties, specify the dollar amount of the gift, and clearly state that the equity is a gift and not a loan. It is non-repayable under any circumstances. Your buyer's lender will provide a template with their specific formatting requirements.

Can gift of equity be used for an investment property in Texas?

No. Conventional lenders only allow gifts of equity on primary residences and second homes, not investment properties. If the buyer plans to rent the property out, this structure won't work with standard financing. An alternative arrangement would need to be structured differently.

What happens to the buyer's cost basis with a gift of equity?

The buyer inherits the seller's original cost basis in the gifted portion, not a stepped-up basis. When the buyer sells the home in the future, their taxable gain is calculated from what the original owner paid, not from the below-market sale price. In high-appreciation markets like the Park Cities, this can result in a larger capital gains liability at the time of a future sale.

About Paul Blair

Paul Blair is the founder and broker of Grey Square, a virtual real estate brokerage representing buyers and sellers across Dallas and Los Angeles. With 22 years in the business and more than $200 million in closed transactions, Paul works the full range of the market, from luxury homes in the Park Cities and Preston Hollow to estates in the Hollywood Hills and across the Westside. Connect with Paul and the Grey Square team at greysq.com. TX TREC #9011505 · CA DRE #01792671.