Buying a Home From a Family Member Below Market Value? Here’s How a Gift of Equity Works in Colorado

By Prerna Kapoor, CLHMS | REAL Brokerage | August 8, 2026

A question I get more often than you’d expect: “Can I just buy my parents’ house for less than it’s worth?” The answer is yes, and there’s actually a name for it, a gift of equity. It’s one of the more overlooked ways Colorado buyers cover a down payment, and it doesn’t involve anyone writing a check.

Here’s the basic idea. A family member sells you a home for less than its appraised value, and the difference between what the home is worth and what you’re actually paying counts as your down payment, or part of it. No cash moves from anyone’s bank account. The equity itself does the work.

What a Gift of Equity Actually Is

Say a home appraises at $500,000 and a parent agrees to sell it to their adult child for $450,000. That $50,000 gap isn’t a discount in the way a seller concession works. It’s treated by the lender as a gift, specifically a gift of the seller’s equity in the property, and it can be applied toward the buyer’s down payment or closing costs. The home still has to appraise at or above the sale price for the numbers to work, and the lender still orders that appraisal independently.

This is different from gift funds, which I wrote about in a separate guide. Gift funds are actual cash a donor wires or hands over. A gift of equity is value that already exists in the property, transferred through the sale price itself instead of through a bank transfer.

Who Actually Qualifies

This only works between family, and lenders are specific about it. Under Fannie Mae’s guidelines, an acceptable donor is generally a parent, grandparent, sibling, aunt, uncle, or adult child, the same relationships allowed for a standard cash gift. FHA loans work the same way, allowing up to 100% of the down payment to come from a gift of equity as long as the seller is a qualifying relative.

The relationship requirement isn’t a technicality. It exists because a stranger “gifting” equity to a buyer looks a lot like a seller inflating the price and kicking money back under the table, which is a form of mortgage fraud. Keeping this inside the family is what makes it legitimate in a lender’s eyes.

How the IRS Sees It

The buyer doesn’t owe income tax on the gift, full stop. The seller is the one who needs to pay attention to IRS gift tax rules. For 2026, an individual can gift up to $19,000 to any one person without any filing requirement, and a married couple can combine their exclusions to gift $38,000 to a single recipient. Go above that, and the seller files a Form 709, but that almost never triggers an actual tax bill. It just counts against a lifetime exemption that sits at $15 million per person for 2026. Most families selling a home to their kid are nowhere close to that number.

I always tell clients this part isn’t something to guess your way through. A CPA or estate attorney should sign off on the structure before you write it into the contract, especially if the equity gift is a large one.

How It Actually Shows Up at Closing in Colorado

On the settlement statement, you won’t see a separate line where money changes hands for the gifted portion. The purchase price in the contract is simply the negotiated, below-market number, and the gift of equity gets documented through a signed gift letter that states the relationship, the dollar amount, and that no repayment is expected. That letter goes to the lender, not the county. You’ll still owe your normal closing costs, and depending on the loan program, some of those can be covered by the same gift of equity if there’s enough left over after the down payment.

One thing worth thinking through before you sign: your cost basis as the buyer is what you actually paid, not the home’s full market value. If you sell the home down the road, that lower basis can mean a bigger taxable gain than you’d expect. It’s not a reason to avoid a gift of equity, but it is a conversation to have with a tax professional while you’re still planning the purchase, not after you’ve closed.

When This Actually Makes Sense

I’ve helped a few families work through this, usually when a parent is downsizing out of a Parker or Highlands Ranch home and would rather keep it in the family than list it on the open market. It tends to work best when everyone involved, including any siblings who aren’t buying the house, is on the same page before the contract gets written. Family real estate deals can get complicated fast if expectations aren’t clear from the start, and that conversation matters as much as the paperwork does. I’ve written before about how more Colorado families are choosing to buy multigenerational homes together, and a gift of equity often ends up being part of that bigger conversation.

If you’re weighing a gift of equity against other ways to get into a home, my Colorado Buyer Financing Playbook walks through the full range of options side by side, and it’s worth reading before you decide which path fits your situation.

Quick answers

Can a gift of equity cover my entire down payment? On an FHA loan, yes, up to 100% of the required down payment can come from a gift of equity if the seller is a qualifying family member. Conventional loan limits depend on your down payment percentage.

Does the seller have to pay tax on a gift of equity? Usually not. Gifts under the annual exclusion ($19,000 per person for 2026) require no filing at all, and larger gifts almost never trigger an actual tax bill, they just use up part of a $15 million lifetime exemption.

Do I still need an appraisal if I’m buying from family? Yes. The lender requires an independent appraisal regardless of the family relationship, and it’s what establishes the equity gap in the first place.

Prerna Kapoor | REALTOR® | Luxury Home Specialist
REAL Brokerage | 720-949-5450 | info@prernakapoor.com
CLHMS • RENE • PSA • ABR | International Sterling Society Award Winner

Prerna specializes in residential real estate across Parker, Aurora, Lone Tree, Castle Pines, Highlands Ranch, Cherry Creek, Greenwood Village, and Centennial. She speaks English, Japanese, and Hindi.