We are on the cusp of the largest intergenerational wealth transfer in history. More than 1 trillion dollars will be passed down by the baby-boomer generation to Gen X and Millennials in the next decade – much of it will be in the form of property, portfolios, and businesses.
When it comes to inheritance, wealthy families have investment and divestment strategies that help with tax deductions. There are many strategies families deploy when handing down assets; the “gift of equity” is one of the most common.
But first, what is equity?
First off, what is home equity exactly? If you were to take the value of your home today and deduct anything that is owed on the property, you are left with the amount of equity you have in your property. In most cases, homeowners pay down their mortgage over time and the property value slowly increases, which increases an owner’s home equity. This means that when you purchase a property, the first step towards building equity in your home is the down payment towards the purchase price.
Now, what is the gift of equity, and how does it work?
Gifted equity is a real estate financing concept used when a property owner “gifts” part of the value of their property to the buyer instead of giving cash. Gifted equity works when a parent is selling a property to an heir at under market value and using the difference as the heir’s down payment.
As an example, I sell my 2M home to my son for 1.6M and gift him the “equity” of $400,000. He is now responsible for a mortgage of 1.6M and has 20% down.
Most typical lenders will allow for this setup; major banks, private lenders, credit unions, etc., but they will require a “equity gift letter.” This is a formal document used in real estate transactions when a seller (usually a parent or close family member) is gifting part of the property’s equity to the buyer. Lenders require this letter to confirm that the equity portion being used as a down payment is a true gift and not a loan that must be repaid. Without this letter, most banks will not approve the mortgage because they need proof that the buyer’s down payment is legitimate and will not create additional debt.
The letter explains that the seller is selling the property below market value, and the difference between the appraised value and the purchase price is the gifted equity. The lender uses that amount to calculate the buyer’s down payment and loan-to-value ratio.
Do you have questions about financing a real estate purchase? Here are a few more posts you may want to check out next:
- Can I Use Rental Income to Qualify for a Mortgage in Canada?
- Mortgage Renewal Vs. Refinance: What Homeowners Need to Know
Here’s an example of an Equity Gift Letter:
Date: March 11, 2026
To: Scotiabank
Re: Gift of Equity for Property Purchase
I, Danielle Mansoor confirm that I am the current owner of the property located at 123 bark lane. I am selling this property to Cookie Mansoor, who is my daughter.
The current market value of the property is $2,000,000, and the agreed purchase price is $1,600,000. The difference of $400,000 represents a gift of equity to the buyer.
I confirm that this equity gift of $400,000 is a true gift and does not need to be repaid, either now or in the future. No repayment is expected, and no lien or secondary financing will be registered against the property for this amount.
This gift is provided to assist the buyer with the purchase of the property.
Donor Name: __________________________
Signature: __________________________
Date: __________________________
Recipient Name: ______________________
Signature: __________________________
Property Address: ____________________
Another strategy to lower estate taxes is to “gift” part of a home to a child long before one dies.
For example, I could “gift” half of the equity of my 2M home to my children long before I die – the home may be worth 2M now and 3M when I die. They would only be responsible for taxes on $1,500,000.00, eliminating a large amount of tax required on the sale of the home after I’ve died.
Looking for an equity gift letter template? I’ve made it easy with a downloadable PDF:
Co-signing a mortgage for your child in Canada
Toronto is expensive; we’re aware, but shouldn’t the biggest and best city in a country come with a hefty price tag? Toronto isn’t what it used to be – so why should the price tag to live here be the same?
Many Toronto parents want their children to live close to them as they grow up, and so often they will need to co-sign for a mortgage if they want them ti remain in the city.
Cosigning for a mortgage means that there are two separate borrowers and two separate credit profiles, both of whom share the legal responsibility of the loan. If the primary borrower stops paying the mortgage, the secondary borrower will then be required to pay.
One of the most common questions I get asked from parents is:
Does co-signing a mortgage affect credit? It does. Because the mortgage appears on the co-signer’s credit report, it can impact their debt-to-income ratios and may reduce their ability to qualify for future loans.
If payments are missed, both the borrower’s and the co-signer’s credit scores can be affected. For this reason, many families treat co-signing as a temporary solution until the buyer’s income grows enough to refinance the mortgage independently and remove the co-signer.
There are also tax implications of co-signing a mortgage in Canada that families should understand. Simply co-signing a loan usually does not create a tax obligation on its own. However, if the co-signer is also placed on the property title, they may technically own a share of the property. If that property later increases in value and it is not the co-signer’s principal residence, capital gains tax could apply on their portion when the home is sold. Because of this, many families consult a real estate lawyer or accountant to structure ownership carefully.
I’ve written about tax implications on the blog before. If you have specific real estate + tax questions, here are a couple posts you might find interesting:
- Calculating Taxes When Selling a Rental Property (Without Losing Your Mind!)
- The True Cost of the New Ontario Luxury Home tax
As it is with the gift of equity, the gift of a down payment also requires a gift letter and accompanying rules. Immediate family members can provide funds toward a home purchase as long as the money is a genuine gift and not a loan that must be repaid. Lenders require a signed letter confirming the amount of the gift, the relationship between the donor and the buyer, and a statement that repayment is not expected. This letter reassures the lender that the buyer is not taking on hidden debt to qualify for the mortgage.
If you’re curious about what co-signing for a loan or gifting equity looks like, give me a shout.
You can text me, call me, send me an email, or fill out the form on this page to get in touch!
