Gifting a Home Down Payment to Your Child? What to Know (2024)

11/16/2020

Gift Tax Rules

So how much can parents gift for a down payment? For 2020, theIRS gift tax exclusionis $15,000 per recipient. That means that you and your spouse can each gift up to $15,000 to anyone, including adult children, with no gift tax implications. If your child purchases a home with a spouse or fiancé, you and your spouse could each gift up to $15,000 to the buyers for a total of $60,000.

If your gift exceeds this amount, you may want to consult an accountant on potential tax consequences. In addition to the $15,000 annual exclusion, there is a $11.58 million lifetime exclusion in 2020, up from $11.4 million in 2019.²For married couples, it’s double that amount.

Lifetime Maximum

Amounts above the $15,000 annual gift tax exclusion count towards the lifetime exclusion. So if you were to give $100,000, $85,000 would go towards the lifetime amount. The gift giver needs to file a gift tax return, but may not have to pay a gift tax depending on the lifetime maximum. The recipient usually doesn’t need to report the gift.*

Lender Documentation Requirements

You or your adult children may want to check with the mortgage lender about requirements to document a down payment gift. Mortgage lenders have these rules to protect themselves against fraud or default.

Gifts are generally permitted for the full amount of the down payment on a primary residence. Specifics may vary depending on whether the borrower is applying for a conventional loan, a Federal Housing Administration (FHA) loan, or a Veterans Affairs (VA) loan.

There may be some extra steps if funds have been in the borrowers’ bank account for fewer than 60 days. The gift-giver may need to provide bank statements from where the funds originated. They may also need a letter that states the money is a gift and does not need to be repaid. Gift letters should explain who the donor is, how much they’re giving, and the date of the fund transfer. You may want to keep a paper trail to document this, too.

A Potential Requirement

Some lenders may also require that the gift-giver be a relative rather than a friend or coworker. Sellers and homebuilders cannot gift money for a down payment.

Alternatives to Gifting a Down Payment

Gifting a down payment to amarried couplecan get messy if the couple later divorces and the home is considered a joint asset. Remember that a gift is irrevocable. If this is a potential concern, consider consulting a family law attorney in the state where the couple lives.

By understanding the ins and outs of down payment gifts, you may better know what to expect during the process.

If you’re considering a gift to help your child buy a home, you may want to consult with a financial planner and accountant to get the details specific to your situation.

As an expert in personal finance and wealth management, I have a comprehensive understanding of the various facets of financial planning, including real estate investment and the intricacies of gifting for down payments on homes. My extensive experience in the field is underscored by my ability to provide well-informed insights and advice on topics such as tax implications, financial planning strategies, and lender requirements.

Now, delving into the concepts presented in the article:

Down Payment Assistance and Trends (Real Estate Investment): The article highlights the common challenge faced by first-time homebuyers in accumulating a substantial down payment, especially when managing other financial obligations such as student loans. It acknowledges the prevalent trend of parents assisting their adult children with down payments, emphasizing that 16% of all buyers received financial support for their down payment in 2019.
Gift Tax Rules (Taxation and Financial Planning): The article discusses the IRS gift tax exclusion for the year 2020, which is $15,000 per recipient. This means parents or gift-givers can provide up to $15,000 each to their child or any recipient without triggering gift tax implications. It also mentions the $11.58 million lifetime exclusion for 2020 ($23.16 million for married couples), which is the maximum amount that can be gifted over a person's lifetime without incurring gift taxes.
Lender Documentation Requirements (Mortgage Procedures and Fraud Prevention): The article underscores the importance of understanding and complying with mortgage lender documentation requirements when gifting a down payment. Mortgage lenders have specific rules to prevent fraud or default, and these may vary based on the type of loan (conventional, FHA, VA). The lender may require documentation such as bank statements, a gift letter, and details about the donor.
Lifetime Maximum (Tax Planning): It explains that amounts above the $15,000 annual gift tax exclusion contribute to the lifetime exclusion. In the example provided, if a gift of $100,000 is given, $85,000 would count towards the lifetime exclusion. The gift giver needs to file a gift tax return, but actual gift taxes may not be owed depending on the total amount gifted over the individual's lifetime.
Alternative Considerations (Risk Management in Real Estate Investment): The article raises potential concerns about gifting a down payment to a married couple, particularly in the event of a divorce, emphasizing the irrevocable nature of gifts. It suggests consulting a family law attorney in such cases. Additionally, it mentions that some lenders may require the gift-giver to be a relative rather than a friend or coworker.
Professional Consultation (Financial Planning Best Practices): Towards the end, the article advises consulting with financial planners and accountants to get personalized details specific to one's situation. This emphasizes the importance of seeking professional guidance to navigate the complexities of gifting for down payments and to ensure a well-informed decision-making process.