There are many home buyers who are fortunate to receive family help towards their down payment or closing costs. If you count yourself among these home buyers using gift funds towards your home purchase, there are some factors you need to consider.
National underwriting guidelines require gifts – and the receipt of these gifts – be documented in a very specific manner. Borrowers must provide to their lender:
- A fully executed Gift Letter (usually a form letter, filled out by both the borrower and donor, where the donor confirms their intention to provide the gift.)
- Documentation such as the donor’s bank statement, verifying the donor has the money to gift and that the funds have cleared the donor’s account.
- Proof of the borrower’s receipt of these gift funds, such as the borrower’s bank statement reflecting the deposit of the gift.
Mortgage lenders must receive these documents before the loan is cleared to close. Since it may take time to obtain these documents (for example, waiting weeks for a bank statement to arrive), it’s prudent that the transfer of gift funds occur as early in the home-buying process as possible. Otherwise the closing may be delayed.
While these families are willing to contribute gift funds towards their relative’s home purchase, I find many wondering whether the Gift Tax applies to these funds. Thus, it’s important that borrowers and families alike understand the Gift Tax provisions in order to take advantage of their allowed exemptions to reduce or possibly eliminate any tax liability.
According to Federal Tax Law, for the 2015 tax year, any one person (donor) may gift to any other person (or as many people as they wish!) up to $14,000 without these gifts being taxable. Then next year, the donor may gift another $14,000 to those same recipients without any of these gifts triggering the Federal Gift Tax. Married couples may gift $28,000 ($14K + $14K) without triggering the Federal Gift Tax. And for married couples gifting, for example, a child and spouse, the gifts can be as much as $56,000! (For example, $14K from dad to son, $14K from dad to daughter-in-law, $14K from mom to son, and $14K from mom to daughter-in-law.)
Beyond this $14,000 per year limit, a lifetime exemption applies to federal estate and gift taxes combined. For donors or estates worth up to $5.43 million ($10.86 million for married couples), any monies gifted above the annual limits would be applied towards the donor’s lifetime exemption. These limits are indexed to the inflation rate and change annually. Thus, for such gifts exceeding $14,000 ($28,000 for married couples), the donor must file a Form 709 Gift Tax Return in order to apply the gift towards their lifetime exemption.
BOTTOM LINE: Unless your net-worth exceeds $5.43 million ($10.86 million for married couples), it’s unlikely you need to worry about the Federal Gift Tax. And since the Gift Tax applies only to donors, the recipient has no liability at all.
This newsletter is for informational purposes only and does not constitute legal, tax, or financial advice. Please consult a qualified tax advisor for advice specific to your situation. For more information, reference IRS Publication 559. While this article discusses the Federal Gift Tax, your state tax laws may be different.
Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist®, and a published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.