Jan 15, 2026
Most people would be thrilled to have a home in their lap at a steep discount. For some Gen Zs and millennials, that’s becoming a reality as baby boomers — and even some Gen X parents — pass homes on to their kids.
Consider this hypothetical example. Kwame is 23 and recently moved out after finishing college. He works at an engineering firm, earns about $3,100 per month after deductions (including 401(k) contributions), has no debt, a strong credit score and $40,000 in savings.
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He rents with roommates and pays $500 a month. But his parents are planning to retire early at 60 and downsize to a smaller home in Florida. They’ve offered to sell him their current home — which is worth $380,000 — for $200,000.
The opportunity gives Kwame an immediate foothold in the housing market, along with $180,000 in built-in equity. Still, he worries that even at a steep discount, the purchase could leave him house-poor.
If his parents don’t expect repayment, the difference between the fair market value (FMV) and the sale price is considered a gift of equity, which can affect gift taxes, his parents’ Medicaid eligibility and how Kwame’s mortgage is structured.
The financial implications of gifting equity
The gift exceeds the $19,000 annual gift tax exclusion, so Kwame’s parents must file IRS Form 709 to report the amount (1). However, unless his parents have exceeded their lifetime exemption ($13.99 million in 2025 and $15 million in 2026), they won’t need to pay taxes on the gift (2).
They’re also unlikely to owe capital gains on the sale portion, as any gain should fall below the $500,000 exclusion for married taxpayers filing jointly on the sale of a principal residence, given the home’s sale price of $200,000.
Kwame’s cost basis in the home will be $200,000 (his purchase price), which could result in a larger capital gain should he sell compared to purchasing at FMV. Again, he would likely qualify for an exemption if the home remains his primary residence (3).
Although Kwame’s parents are relatively young, they should consider the potential impact of the transfer on future Medicaid long-term care eligibility.
Medicaid has a five-year look-back period for asset transfers and transferring property below fair market value could be treated as a disqualifying transfer, triggering a penalty period of Medicaid ineligibility.
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Because the $180,000 in gifted equity is approximately 47% of the home’s value, Kwame should be able to obtain a mortgage without a cash down payment or private mortgage insurance. His parents will likely need to provide a gift letter confirming the amount of equity gifted and stating that it is not a loan.
The lender will also require an appraisal to verify the home’s FMV and the amount of gifted equity. As a result, Kwame may choose to make no down payment or apply some or all of his $40,000 in savings toward the purchase.
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It’s a great opportunity, but is it affordable?
The average rate for a 30-year fixed-rate mortgage in the U.S. is 6.15% as of December 31, 2025, when Kwame is considering this (4). If Kwame took this mortgage without a down payment, he’ll pay $1,218.46 per month in principal and interest, for a total of $438,642.
If he puts down the entirety of his $40,000 in savings, he’ll pay $975.12 per month and spend $391,043.20 total for the house with the down payment, principal and interest. But he would also have no financial cushion should he need one.
Alternatively, Kwame could also choose a smaller down payment. In 2025, the median down payment for first-time home buyers in the U.S. was 10% (5). If Kwame puts down 10%, or $20,000, his monthly payment would be $1,103.61 and the total cost for the home would be $417,300.48.
These figures do not include other costs of homeownership such as utilities, maintenance and homeowners’ insurance. Those expenses can be significant: In 2025, the average cost of additional expenses is about $21,400 per year, or roughly $1,783 per month (6).
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Kwame will also need to budget for closing costs, which typically range from 2% to 5% of the purchase price ($4,000 to $10,000) (7).
Kwame earns approximately $50,000 per year at this point — not far from where he should be on the mortgage income calculator in order to afford the home, if he were to make a $40,000 down payment. Lending guidance suggests that allocating no more than 28% of gross income to housing costs can improve a borrower's ability to manage mortgage payments, according to Kiplinger (8).
This suggests Kwame should budget about $1,400 per month for housing. However, once Kwame accounts for additional ownership costs of $1,800 per month, the total housing expenses would exceed double that guideline.
If he puts down 15%, or $30,000, he would retain $10,000 for closing costs and have monthly mortgage payments of $1,042.30. That would put his total housing costs at just over $2,800 per month, leaving him on a very tight budget.
However, Kwame may be able to offset some of the immediate impact of some housing costs through a home equity line of credit. And, because he is early in his career, his income will likely increase over time. He may even want to consider asking his roommates to move in and pay him rent, which could subsidize some of those mortgage payments.
In a tight housing market, this purchase could give him a meaningful head start — as long as he can realistically manage the cash flow and build room in his budget.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Congress.gov IRS (1); Congress.gov (2); LegalClarity (3); Federal Reserve Bank of St. Louis (4); National Association of Realtors (NAR) (5); Bankrate (6); Zillow (7); Kiplinger (8)
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Vawn Himmelsbach is a veteran journalist who has been covering tech, business, finance and travel for the past three decades. Her work has been featured in publications such as The Globe and Mail, Toronto Star, National Post, Metro News, Canadian Geographic, Zoomer, CAA Magazine, Travelweek, Explore Magazine, Flare and Consumer Reports, to name a few.
