A 23-year-old engineering firm employee is evaluating an offer from his parents to purchase their home at a significant discount. Kwame, who recently graduated college and earns about $3,100 monthly after deductions, rents with roommates for $500 a month. His parents plan to retire early at 60 and downsize to Florida, proposing to sell their $380,000 home to him for $200,000.
The arrangement would provide Kwame with immediate housing market entry and $180,000 in built-in equity. However, he expressed concern that even with the discount, the purchase could strain his finances. The difference between the fair market value and sale price constitutes a gift of equity, which may affect gift taxes, his parents' Medicaid eligibility, and mortgage structuring.
Because the $180,000 gift exceeds the $19,000 annual exclusion, Kwame's parents must file IRS Form 709. They likely won't owe taxes unless they've exceeded their lifetime exemption, currently $13.99 million in 2025. Capital gains taxes are also unlikely given the sale price falls below the $500,000 exclusion for married taxpayers selling a primary residence.
Kwame's cost basis would be $200,000, potentially creating larger capital gains if he sells compared to purchasing at market value. His parents, though relatively young, should consider how the transfer might impact future Medicaid long-term care eligibility. Medicaid has a five-year look-back period for asset transfers, and selling below market value could trigger a penalty period of ineligibility.
The gifted equity represents approximately 47% of the home's value, allowing Kwame to potentially obtain a mortgage without a cash down payment or private mortgage insurance. His parents would need to provide a gift letter confirming the equity amount isn't a loan. A lender would require an appraisal to verify the home's market value and gifted equity amount.
Kwame has $40,000 in savings and no debt. As of December 31, 2025, the average 30-year fixed mortgage rate is 6.15%. Without a down payment, his monthly principal and interest would be $1,218.46, totaling $438,642. Using his entire $40,000 savings would reduce payments to $975.12 monthly and $391,043.20 total, but leave no financial cushion.
A 10% down payment of $20,000 would result in $1,103.61 monthly payments and $417,300.48 total cost. These figures exclude additional homeownership expenses averaging about $21,400 annually in 2025, or roughly $1,783 monthly. Closing costs typically range from 2% to 5% of the purchase price, or $4,000 to $10,000.
Kwame earns approximately $50,000 annually. Lending guidance suggests allocating no more than 28% of gross income to housing costs, or about $1,400 monthly for Kwame. With additional ownership costs, total housing expenses would exceed double that guideline. A 15% down payment of $30,000 would leave $10,000 for closing costs and create $1,042.30 monthly mortgage payments, resulting in total housing costs just over $2,800 monthly.
Kwame may offset some costs through a home equity line of credit. Early in his career, his income will likely increase over time. He could consider having roommates pay him rent to subsidize mortgage payments. In a tight housing market, this purchase could provide a meaningful head start if he manages cash flow effectively.