With the holiday season of giving just around the corner, it’s a good time to visit down payment gifts for home buyers. Getting money for a down payment on a home purchase could be the best gift ever, but there are rules for gifts that you must know to make sure everything goes smoothly.
Gifts must be from family members.
As an overarching rule, mortgage lenders require gifts for down payments to be from family members. Lenders might make case-by-case exceptions, and if so, will require that the relationship of the non-relative and the other factors of the loan profile be strongly compelling. For example, if you were receiving down payment gift funds from your godparents and could document that they’ve been close to you and your family all your life, that might be a case certain lenders would accept.
Gift tax is imposed on the donor, not the receiver.
Two main provisions of gift tax law impact donors, and if handled properly, can enable the donor to have no tax liability, even for large gifts.
Annual gift tax exclusion limit
First, under the annual gift tax exclusion law, any individual can gift any other individual $14,000 per year tax free. So a married set of parents can each give $14,000 to their single child for a total of $28,000. Or that same set of parents could gift to a married couple a total of $56,000 without tax implications.
This doesn’t need to be filed on annual tax returns, but you need to make sure it’s easy to document gift tax compliance later if needed. The clearest way to handle the $56,000 example is to have the mom write two $14,000 checks: one to her son and one to her daughter-in-law. Then the dad would do the exact same thing, for a total of four checks of $14,000 each. Then if the parents were ever asked by the IRS to demonstrate they were within the annual exclusion limit, it would be easy.
Lifetime gift tax exclusion limit
Second, under the lifetime gift tax exclusion law, any individual can gift up to $5.34 million tax free over a lifetime. So let’s say in the example above that the married set of parents were trying to gift their married son a total of $100,000. We know that they can gift $56,000 tax free under the annual exclusion rule. The remaining $44,000 can be gifted tax free under the lifetime exclusion rule. That amount can all be transferred in a lump sum, and the donors must complete IRS Form 709 to keep a tally of gift funds that fall under the lifetime exclusion. Both the annual and lifetime exclusions change each year.
Gift donors must provide letter & bank statement to lenders.
It’s not enough to tell your lender you’ll be getting gift funds from a family member. Lenders must track gift funds as painstakingly as they track all your other asset and income documentation.
The funds can’t just appear from your family donor, so add this topic to the list of things to talk about upfront. Here are the most important things to know:
- You and the donor must both sign a lender Gift Letter verifying the funds are in fact a gift.
- The letter will explicitly ask the donor to verify that the gift isn’t a loan.
- Neither you nor the donor writes the letter. The letter will be provided by your lender, and it’s the only format that the lender will accept.
- For most loans, donors must also provide proof of their ability to gift, usually in the form of a bank statement. There are very few exceptions, and your lender can advise on whether it will waive the requirement.
As long as donors know these lender and tax rules upfront, the process is simple. So as we enter the season of gift giving, you can use these guidelines. Please consult your tax preparer or accountant and local lender to verify and craft a plan that works for you.
*Original article published HERE
