Buying a family member’s home in New Jersey
Gift of Equity: How It Works When You Buy a Family Home in New Jersey
A gift of equity is a family member selling you their home for less than it appraises for, with the difference credited to you at closing as your down payment. On a home appraised at $600,000, a $120,000 gift means you pay $480,000, which is 80% loan-to-value if you borrow all of it. In New Jersey a parent-to-child deed is also exempt from the realty transfer fee.
By Jimmy Joseph, MBA, loan officer, NMLS #1577754, CMG Home Loans (NMLS #1820). Loan rules from Fannie Mae and HUD, tax rules from the IRS and the NJ Division of Taxation, checked November 4, 2026. Not tax or legal advice. Equal Housing Opportunity.
Ask Jimmy about a family sale
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- Who can give it (FHA)
- Family
- family members only, HUD's list
- 2026 annual exclusion
- $19,000
- per giver, per recipient
- Fannie Mae buyer contribution
- $0
- one-unit home you will live in
- NJ transfer fee, parent to child
- Exempt
- NJ Division of Taxation
The short answer
A gift of equity is a gift from the seller to the buyer that never leaves the seller’s bank account. Fannie Mae defines it as “a portion of the seller’s equity in the property” that “is transferred to the buyer as a credit in the transaction” (Selling Guide B3-4.3-05). For example, a parent sells the family home to a son or daughter below its appraised value.
- It works like a down payment. The credit can pay all or part of the down payment and closing costs; Fannie Mae does not let it count as reserves.
- The giver must be family, or close to it. FHA allows only Family Members as HUD defines them. Fannie Mae allows relatives and a few relationships it treats like family.
- It needs a gift letter. Signed by the giver, and for FHA by the buyer too, saying no repayment is expected.
- It is a gift for tax purposes. Above $19,000 per giver in 2026, the giver generally files Form 709; the buyer’s tax basis is not the appraised value.
- New Jersey adds two rules. A parent-to-child deed is exempt from the realty transfer fee, and the state’s inheritance tax looks back three years at transfers made for less than full value.
A worked example: a $600,000 house sold to a daughter
An illustration with round numbers, not a quote or a real sale. Two parents own their home together. It appraises at $600,000. They sell it to their daughter, who will live in it, with a $120,000 gift of equity. Their own basis in the house (what they paid plus improvements) is $250,000.
| Line | Amount | Rule behind it |
|---|---|---|
| Appraised value and contract price | $600,000 | The gift is measured against the appraisal |
| Gift of equity, credited at closing | $120,000 | 20% of value; funds the down payment |
| What the daughter pays, all borrowed | $480,000 | 80% loan-to-value |
| Conventional mortgage insurance | Not required | Fannie Mae requires it only above 80% LTV |
| FHA 3.5% minimum investment | $21,000 | HUD: must not come from the seller; ask how the lender counts the gift |
| Each parent’s gift (half each) | $60,000 | $41,000 above each one’s $19,000 exclusion |
| Reported on two Forms 709 | $82,000 | Counted against the $15,000,000 basic exclusion |
| Daughter’s starting tax basis | $480,000 | Greater of $480,000 paid or the parents’ $250,000 |
| NJ realty transfer fee on the deed | Exempt | Deed between parent and child |
Closing costs, property taxes and the parents’ own capital gains are left out; a tax professional works those out for your family. The basis rule is from 26 CFR 1.1015-4.
Gift of equity calculator
What the gift does to the loan and the tax paperwork
Enter the appraised value and the gift. It assumes the buyer borrows everything the gift does not cover and leaves closing costs out. Math only: it shows no rates or payments, is not an approval and is not tax advice.
Between $50,000 and $10,000,000.
More than $0 and less than the value.
Owners giving the gift
Two owners of the home each give their share, and each has a $19,000 exclusion for 2026.
What they paid plus improvements. Leave blank if unknown.
- Buyer still pays the sellers
- $480,000
- The gift is 20% of the value.
- Loan-to-value if all of that is borrowed
- 80%
- At or under 80%: Fannie Mae's mortgage insurance rule does not apply.
- FHA minimum investment (3.5%)
- $21,000
- HUD says this must not come from the seller; ask your lender how it treats a family gift of equity here.
- Above the 2026 annual exclusion
- $82,000
- Over $38,000: reported on Form 709 and counted against the lifetime exclusion.
- Buyer’s starting tax basis
- Add the sellers' basis
- The greater of what the buyer paid or the sellers’ basis (26 CFR 1.1015-4), not the appraised value.
FHA vs Fannie Mae: the gift of equity rules side by side
Two rule books cover the loans on this page: HUD’s Handbook 4000.1 for FHA, and Fannie Mae’s Selling Guide for conventional loans it buys. Where they differ decides which loan fits your family.
| Rule | Conventional (Fannie Mae) | FHA (HUD 4000.1) |
|---|---|---|
| Who may give it | A relative by blood, marriage, adoption or legal guardianship; also a domestic partner, fiancé(e), former relative, or someone with a long-standing familial-like or mentorship relationship. | Only a Family Member: child, parent, grandparent, spouse or domestic partner, adopted or foster child, brother or sister (including step), uncle, aunt, or an in-law. |
| Which homes | Principal residence or second home. Gifts are not allowed on an investment property. | Property being sold to another Family Member. Family sales of a principal residence carry the 85% rule below. |
| What it can pay for | All or part of the down payment and closing costs, including prepaid items. Not financial reserves. | Equity credit as a gift. HUD separately says the 3.5% Minimum Required Investment must not come from the seller, so ask your lender how it counts the gift. |
| Buyer's own money | None required on a one-unit principal residence. A two- to four-unit home or second home above 80% LTV needs 5% from the buyer first. | At least 3.5% of the Adjusted Value, from a source HUD permits; not from the seller. |
| Loan-to-value cap | Above 80% LTV, a loan Fannie Mae buys needs mortgage insurance (or another credit enhancement Fannie Mae accepts). | Family sales are capped at 85% LTV, unless you buy a family member's principal residence or a family-owned home you have rented for at least six months. |
| Paperwork | A gift letter signed by the giver, and the settlement statement showing the gift of equity. | A gift letter signed and dated by the giver and the buyer. |
Who counts as family
HUD’s list is specific. A niece buying from her aunt qualifies, because an aunt is on the list. A cousin, or a friend who has been like family, is not on HUD’s list, so that sale would need a conventional loan, where Fannie Mae accepts “an individual with a long-standing familial-like or mentorship relationship.” On a conventional loan, Fannie Mae also says the giver cannot be tied to the builder, the real estate agent or another interested party in the sale.
FHA’s 85% cap on family sales, and when it does not apply
FHA calls a sale between family members an Identity-of-Interest transaction and caps it at 85% loan-to-value. The cap does not apply when you buy, as your own principal residence, the principal residence of another Family Member, or a family-owned home you have rented for at least six months before the contract, with a lease or other proof. So buying a parent’s rental that you have not rented for six months falls under the 85% cap.
What the gift of equity letter must say
Ask your lender for its gift letter form. Fannie Mae and HUD both require these items:
- The giver's name, address and telephone number.
- The giver's relationship to the buyer.
- The dollar amount of the gift (Fannie Mae accepts the actual or the maximum amount).
- A statement that no repayment is expected or required.
- For an FHA loan: the date and both signatures, the giver's and the buyer's.
Fannie Mae also requires the settlement statement that lists the gift of equity in the loan file, so the credit must appear on your Closing Disclosure.
Gift of equity taxes: the giver, the buyer and the basis
The IRS treats a sale for less than full value as partly a gift. The 2026 Form 709 instructions say the gift tax applies to “sales or exchanges, not made in the ordinary course of business, where value of the money (or property) received is less than the value of what is sold or exchanged.”
- The $19,000 line. The annual exclusion is $19,000 per recipient for 2026. Each owner of the home gives their own share, so two parents can give $38,000 between them before either files for it.
- Above the line, a return, not automatically a tax bill. A giver whose 2026 gifts to one person total more than $19,000 generally files Form 709 “whether or not any tax is ultimately due.” The excess is counted against the basic exclusion amount, which is $15,000,000 for 2026.
- The giver pays any gift tax, not the buyer. The IRS says the donor is generally responsible for paying it.
- The buyer’s basis. For a sale that is part gift, the buyer’s starting basis is the greater of what they paid or the seller’s adjusted basis (26 CFR 1.1015-4), not the appraised value. In the example, $480,000, not $600,000. A lower basis means more gain to figure if the buyer sells one day, so keep the closing papers.
The New Jersey rules for a family sale
The realty transfer fee
New Jersey charges the seller a realty transfer fee when the deed is recorded, unless the deed is exempt. One of the listed exemptions is a deed “between husband and wife, or parent and child.” The Division of Taxation’s FAQ spells out family cases:
- Parents selling to their daughter and son-in-law: exempt.
- A parent selling to a daughter and her live-in partner: half the price is exempt, half is taxed.
- A parent selling to an adopted child: exempt. To a stepchild who was not adopted: not exempt.
- A parent putting the house in a trust for the children: not exempt.
The seller claims an exemption on Form RTF-1, filed with the deed. Sales over $1,000,000 also carry the separate Graduated Percent Fee; our NJ seller closing costs guide covers its rates and exemptions, and your closing attorney decides which apply to your deed.
The inheritance tax look-back
New Jersey’s inheritance tax treats property a person transfers in the three years before death, for less than full fair market value, as a transfer to report (NJ Division of Taxation). Who receives it decides whether tax is due. Children, grandchildren, parents and spouses are Class A, and Class A beneficiaries are exempt. A brother or sister is Class C, and a niece, nephew or cousin falls in Class D, so a gift of equity to them is the case to raise with an estate attorney.
How a gift of equity sale works, step by step
Talk about the number as a family first
The gift is the appraised value minus what the buyer pays. Agree on the gift in dollars, and ask your attorney how any mortgage the sellers still owe on the home will be handled at closing.
Get pre-approved and tell the lender it is a family sale
FHA calls it an Identity-of-Interest transaction and Fannie Mae has its own donor rules, so the lender needs to know at the start, not at underwriting.
Write the contract at full value with the gift as a credit
Fannie Mae describes the gift as a credit in the transaction. Your attorney writes the price and the gift of equity into the contract. If your contract has New Jersey's attorney review clause, review runs three business days.
Order the appraisal
The appraisal sets the value the gift is measured against, and the lender's loan-to-value math depends on it.
Sign the gift letter
Use your lender's form. It names the giver, the relationship, the amount and says no repayment is expected.
Check the Closing Disclosure and the deed paperwork
The gift of equity should appear as a credit on your settlement statement. If the deed is exempt from New Jersey's realty transfer fee, the seller files Form RTF-1 with the deed to claim it.
File the gift tax return if the gift is over the line
Each giver whose 2026 gifts to the buyer total more than $19,000 generally files IRS Form 709, even when no tax is due. Ask a tax professional about it.
For step 3, read how New Jersey attorney review works. For the rest of your cash to close, the NJ buyer closing costs guide lists each line.
Five ways a family sale goes wrong
- Telling the lender late. The donor and loan-to-value rules shape the whole file, so the lender needs to know it is a family sale at the start.
- A giver who is not on the list. A cousin’s gift of equity does not work on an FHA loan.
- A rental, not a residence. Fannie Mae does not allow gifts on an investment property, and FHA’s 85% cap applies to a family rental you have not lived in for six months.
- Counting the gift as savings. Under Fannie Mae’s rule the gift of equity cannot be used as reserves.
- Assuming the appraisal is the tax basis. The buyer’s basis is what they paid or the sellers’ basis, whichever is greater.
Buying a home from family in New Jersey?
Tell Jimmy who is selling, the town and roughly what the home is worth. He’ll go through which loan fits the relationship, what the gift letter needs and what to have ready for pre-approval. Eligibility and approval follow program rules and the lender’s review; any credit check is explained before you authorize it. For tax questions, talk to a tax professional.
First home? See New Jersey’s first-time home buyer programs.
Frequently asked questions
What is a gift of equity?
It is a gift from the seller of a home to the buyer, given as a credit at closing instead of cash. Fannie Mae defines it as a portion of the seller's equity transferred to the buyer as a credit in the transaction. In practice a family member sells you their home for less than its appraised value, and the difference counts toward your down payment and closing costs.
Who can give a gift of equity?
For an FHA loan, only a Family Member as HUD defines it: a child, parent or grandparent (including step and foster), spouse or domestic partner, an adopted or foster child, a brother or sister (including step), an uncle or aunt, or an in-law. For a conventional loan sold to Fannie Mae, the giver must be an acceptable donor: a relative, or a domestic partner, fiancé(e), former relative, or someone with a long-standing familial-like or mentorship relationship. Fannie Mae also says that giver cannot be tied to the builder, the real estate agent or another interested party.
Can a family friend give a gift of equity?
Not on an FHA loan, where only Family Members may provide equity credit. On a conventional loan sold to Fannie Mae, a non-relative can qualify only if they share a familial-like relationship with you as Fannie Mae describes it, such as a long-standing familial-like or mentorship relationship. Your lender decides whether the relationship is documented well enough.
Do I have to pay taxes on a gift of equity?
The buyer does not pay gift tax on it; the IRS says the donor is generally responsible for paying the gift tax. For 2026 each giver can give $19,000 to one person without it counting against their lifetime exclusion. Above that, the giver generally files Form 709 and the amount is counted against a basic exclusion of $15,000,000, so filing the return does not by itself mean tax is due. The buyer's starting tax basis is the greater of what they paid or the sellers' basis, which matters when they sell later.
Do you have to pay back a gift of equity?
No. Both Fannie Mae and FHA require a gift letter that states no repayment is expected or required. HUD defines gifts as contributions with no expectation of repayment, so money that will be paid back is not a gift.
What is the IRS gift limit for 2026?
The annual exclusion is $19,000 per recipient for 2026, the same as 2025. A married couple who own the home together can each give their share, so up to $38,000 to one buyer before either of them files a gift tax return for it. The 2026 basic exclusion amount is $15,000,000 per person.
Can a gift of equity cover the whole down payment?
On a conventional loan it can. Fannie Mae lets a gift of equity fund all or part of the down payment and closing costs on a principal residence or second home, with no minimum contribution from the buyer on a one-unit principal residence; it cannot be counted as reserves. On an FHA loan, HUD lets Family Members give equity credit, but also says the buyer's 3.5% Minimum Required Investment must not come from the seller of the property. Ask your lender how it applies both rules to your file before you count on the gift for the 3.5%.
Is a parent-to-child sale exempt from New Jersey's realty transfer fee?
Yes. A deed between parent and child is exempt from the realty transfer fee, and the NJ Division of Taxation's FAQ says a sale from parents to their daughter and son-in-law is exempt too. A sale to a child and an unmarried partner is only half exempt, a stepchild who was not adopted does not qualify, and a transfer into a trust for the children is not exempt. The seller files Form RTF-1 with the deed to claim the exemption.
Related guides
- First-Time Home Buyer Programs in New Jersey→Every statewide program side by side, with the county down payment assistance amounts.
- FHA Loan Requirements in NJ→Credit, down payment, debt and property rules from HUD's handbook, including gifts.
- NJ Seller Closing Costs and the Mansion Tax→The realty transfer fee, the Graduated Percent Fee and their exemptions.
- How Pre-Approval Works→What a lender checks before you sign a contract, and what to have ready.
Sources
- Fannie Mae Selling Guide, B3-4.3-05, Gifts of Equity (10/07/2020)
- Fannie Mae Selling Guide, B3-4.3-04, Personal Gifts (02/04/2026)
- Fannie Mae Selling Guide, B7-1-01, Provision of Mortgage Insurance (04/02/2025)
- HUD, FHA Single Family Housing Policy Handbook 4000.1, last revised August 12, 2026: Family Member (p. 136), Minimum Required Investment (pp. 178, 181) and its sources (p. 254), Identity-of-Interest LTV (p. 180), Gifts of Equity (p. 260)
- IRS, Frequently asked questions on gift taxes (annual exclusion table updated December 2025)
- IRS, What's new: estate and gift tax (2026 basic exclusion amount)
- IRS, 2026 Instructions for Form 709 (draft): who must file
- 26 CFR 1.1015-4, Transfers in part a gift and in part a sale
- NJ Division of Taxation, Property sale realty transfer fee: exemptions and Form RTF-1
- NJ Division of Taxation, Realty transfer fee FAQs (parent and child sales)
- NJ Division of Taxation, Inheritance and Estate Tax definitions (transfers during a decedent's lifetime)
- NJ Division of Taxation, Inheritance Tax beneficiary classes
- NJ Division of Taxation, Form IT-R instructions (Class A beneficiaries are exempt)
Equal Housing Opportunity. Jimmy Joseph, MBA is a loan officer, NMLS #1577754, with CMG Mortgage, Inc., dba CMG Home Loans, NMLS #1820. This page is general information about loan program and tax rules as published by Fannie Mae, HUD, the IRS and the State of New Jersey on November 4, 2026. It is not tax or legal advice, not a commitment to lend, and does not quote rates. Program rules and lender requirements change; confirm your situation with your loan officer, attorney and tax professional.