Real estate prices have gone up faster than wages and that has made access to homeownership a challenge for many. At the same time, grandparents and parents are finding their house is now too big for their needs… and it has appreciated nicely in value. A gift of equity is one way to help loved ones achieve their dream of buying a home while redistributing part of the family wealth during your lifetime. Read on to learn more.
What exactly is a gift of equity?
Basic definition of a gift of equity
It’s considered a gift of equity when a property is sold for a price lower than its actual market value to a child or close family member. The difference between the sale price and the market value as determined by an external expert is considered a gift. This amount can be used as a down payment to buy a property.
What exactly is equity in a home?
Equity is the difference between a property’s market value and the remaining balance on the mortgage or other financing. It’s the share of a house that fully belongs to its owners. Equity builds as repayments are made and the property’s value appreciates, whether through upgrades or due to a bullish real estate market.
How does equity gifting work in Quebec?
Banking requirements
A gift of equity is subject to specific conditions with many mortgage lenders:
The value of a property has to be higher than its mortgage. You can’t gift equity when there is none!
Most financial institutions and mortgage brokers limit this practice to immediate family members (gifting between parents and children or between brothers and sisters) or those in direct lineage (between grandparents, parents and children).
A property appraisal has to be carried out by an external chartered appraiser to ensure a fair and impartial assessment.
Writing a gift of equity letter
Most lenders require a letter officially signed by the donor that makes a donation irrevocable. This letter also states a property’s market value as well as its agreed upon sale price, after subtracting the gift of equity.
Gift of equity and downpayment
The amount of the gift is added to the downpayment, which can be supplemented by personal savings. If the downpayment is at least 20% of a property’s market value — irrespective of the gift of equity — there’ll be no need to take out mortgage loan insurance.
A gift of equity can also be combined with various access to property programs, like the tax-free First Home Savings Account (FHSA) and the Home Buyer’s Plan (HBP).
All about registered savings plansTax impact of a gift of equity
Even if a property is sold at a reduced price, the tax treatment will be based on the full market value.
The sale of a principal residence eligible in Canada is tax-free as long as the following exemption criteria are met:
You are the owner of the property.
The property was acquired solely for the purpose of obtaining the right to occupy it.
The property is occupied at some time during the year by its owner (or the owner’s partner or child).
The property was designated as the owner's principal residence for each year of ownership.
The sale of a secondary residence, land or income property may result in a capital gain, which is profit calculated as the difference between the property's original purchase price and its current market value.1 According to Canadian tax law, this gain is at least partly taxable. Specifically, for the first $250,000 of profit realized on this sale, half is added to the individual's taxable income for the current year.2 Beyond this $250,000 threshold, two-thirds of additional gains are also taxed.
Can the welcome tax be waived?
In Quebec, a gift of equity between close family members (such as children, parents and grandparents) is generally exempt from real estate transfer duties on the property. However, this exemption doesn’t apply if the transfer is between brothers and sisters.
How to calculate the amount of a gift of equity?
Sample calculation for a principal residence
Sacha’s grandparents are moving into a retirement residence and want to sell their house to her. The market value of their bungalow was set at $400,000 but they offered to sell it to Sacha at the reduced price of $320,000.
The $80,000 difference is the gift of equity. This amount represents a 20% downpayment, which means Sacha doesn’t have to take out mortgage loan insurance. Her grandparents have no tax to pay here as it’s their principal residence.
Secondary residence: a special case
If Sacha had paid $320,000 and bought the family cottage instead (for argument’s sake, say it has the same market value), it wouldn’t affect her situation at all… but it would have different tax implications for her grandparents.
Originally built for $75,000 and now with a fair market value of $400,000, the cottage would have generated a taxable profit of $325,000 ($400,000 - $75,000). This amount is divided equally between two owners, so $162,500 per person. As this gain is below the $250,000 threshold found in Canadian tax law, only 50% of the capital gain is added to each grandparent’s taxable income, in this case $81,250. Part of the profit from the cottage sale would therefore be used to cover the tax on this gain.
Discover three ways to unlock equity
A gift of equity lowers the amount needed to finance the purchase of a home. From day one, the buyer owns a share of the equity and can use this asset in a variety of ways.
1. Mortgage refinancing
When a mortgage is renewed (or earlier, under certain conditions), you can borrow or re-borrow up to a specified percentage of the property's market value. Funds are deposited directly in the active account and can be used for various projects, like renovations or buying a vehicle. Repayment is made through your mortgage payments, according to the terms you choose.
2. Second mortgage
Instead of modifying or renewing an existing mortgage, a second mortgage can be taken out. This option avoids any penalties associated with early renewal while maintaining the terms of the first mortgage when these are more advantageous.
3. Mortgage (or home equity) line of credit
This product allows you to borrow up to a maximum amount based on the value of the property you own. Repayment is conveniently flexible. You pay only monthly interest for a certain period of time and can pay off the entire amount at once, without penalty.
What types of property are eligible for a gift of equity?
Various categories of property
House, cottage, condo, land, commercial building or income building: any of these properties can be the subject of a gift of equity. However, among those, only the sale of a principal residence is usually not taxable, thanks to the capital gains exemption.
Need a professional to assess your property’s market value?
Professional appraisals and comparables method
A mortgage lender or financial institution will likely assign a certified appraiser to establish a property’s fair market value. This service generally costs a few hundred dollars. Check with a member of the Ordre des évaluateurs agréés du Québec (French only) to find out about the budget to anticipate depending on your home.
Before going ahead with this step and if you plan to use the services of a real estate broker, your chosen broker can assess a building’s market value by using the comparables method.
This method involves analyzing the sale price of similar properties that have recently sold in the same area or neighbourhood and then taking note of the differences between properties. This exercise could also give an idea of the equity available to arrange a gift of equity. Would you like to learn more about this service?
Get in touch with ConfiaAssess your property’s market value yourself?*
The EspaceProprio mobile app includes a market value assessment tool (MVA). Using artificial intelligence and various real estate market data sources, this tool allows you to estimate the fair selling price of a property. It provides invaluable information though this should never replace a professional assessment. Download the app on the App Store or Google Play.
*The value generated by the market value assessment feature does not constitute an appraisal, an actual value or a guaranteed selling price, or the opinion of a real estate broker or licensed appraiser as to the price or fair market value of the subject property. Information is provided for reference purposes only and should never replace the advice of a professional regarding the assessment of a property’s market value.
Customized support courtesy of Confia
The Confia real estate agency stands out for its customized support throughout the buying or selling process. It connects you with brokers who can adeptly adapt to your unique situation and current market dynamics.
Whether you need help understanding the ins and outs of a gift of equity or you’re looking for answers to your questions about home ownership, the broker you choose will be there every step of the way to help. Their support ensures that you make informed decisions with complete confidence.
So how does it work? The first step to benefitting from Confia services involves contacting a broker. During this initial discussion, our team will take the time to analyze your needs and real estate goals. At that point, we will suggest real estate brokers recommended by Confia who best match your needs.
Gift of equity FAQ
How do I make a gift of equity in my lifetime?
A gift of equity is a way to sell property at a lower price to a family member. It can facilitate access to home ownership by bequeathing an inheritance during your lifetime — sometimes without any tax impact.
Does a donor’s age have any bearing on a gift of equity?
No, it doesn’t have any bearing on a gift of equity. However, a majority of mortgage lenders and financial institutions will only accept this type of arrangement between immediate members of your family or direct descendants.
What fees are involved with donating a piece of real estate?
Expect the same fees as those involved with any other real estate transaction, including notary fees and a broker commission, if applicable. The only additional expense is for a report by a chartered appraiser and its cost will vary according to building size and complexity of the inspection.
Is a gift of equity taxable?
Selling a principal residence with a gift of equity is usually not taxable, thanks to the capital gains exemption.
Any other property, like a chalet or rental building, is deemed to have been sold at its market value, which could result in a capital gain owing. For each individual, half of all profits up to $250,000 is added to their taxable income for the year, followed by two-thirds of any excess amount.