What to do with gifts for down payment.
Gift Funds and How to Verify Them
Maybe you’re looking to buy a new home, but you’re hoping to get some help over the holidays from your family. You can definitely use these monetary gifts fore down payment of a new house. But you need to be aware of the rules and regulations governing cash gifts for down payments.
Zachery Adam of Prime Mortgage Lending of West Asheville (dba PrimeRate Mortgage), an independent mortgage lender, wants to help you take full advantage of any extra funds coming your way. The IRS, of course, has rules in place to make sure gifts are legal and accounted for from a tax revenue perspective. So, to help you navigate the sometimes murky waters of government regulations, here are some of the guidelines explained in simple English:
Gifts Must Be from Your Family
If you receive one or more gifts for down payment, the money has to come from your family members. That’s the general rule among mortgage lenders to avoid the appearance of impropriety. And this makes it simple and straightforward: if you want to use holiday gift money for the down payment of a house, it must be from your family.
Your mortgage lender may make an exception for you, but that has to be done on a case-by-case basis. These exceptional cases have to be really compelling — like a gift from a godparent. Even then you have to be able to show documentation that this person has been close to your family your entire life.
‘Tis Better to Give Than Receive (Unless You’re Taxed)
If multiple family members offer you generous gifts to use toward your down payment, make them aware that they may be on the hook for the taxes. In gift funding, the donor is taxed, not the recipient. It’s a confusing aspect of tax law for many people.
In gift tax law, there are two provisions that can affect donors. If handled correctly, however, these provisions can prevent your generous family members from paying any taxes, even on substantial gifts for down payment. These provisions are:
1. Gift tax exclusion
2. Lifetime giving limits
Gift Tax Exclusion
This first provision can provide tax relief to your family member when offering a gift for your down payment. Passed into law in 2014, the annual gift tax exclusion law stipulates that any person can gift any individual $14,000 per year with no tax. It’s based on individuals, so as a couple, your parents could each give you $14,000 per year, completely tax-free. For that matter, each parent can gift up to $14,000 to you and your spouse, for a total of $56,000.
You don’t even have to report the gifts on your income tax return. Just save your receipts in case you’re asked for proof of the down payment gifts. The best way to handle this, using the example above, is to ask each parent to write two checks, one to you and one to your spouse. In the end, you’d have in four $14,000 checks. If the IRS does come calling, you can protect yourself with the record of these checks.
Lifetime Gifting Limits
The second provision under the 2014 gift tax law is the lifetime gift tax exclusion. It allows any individual to gift up to the amount of $5.34 million, tax-free, over the course of a lifetime. Using the above example, let’s say your parents wanted to give you and your spouse $100,000 total as gifts for down payment. The first $56,000 is covered under the annual exclusion provision, and the remaining $44,000 can be given under the lifetime exclusion rule.
In both scenarios, the money gifted is completely tax-free. Neither you nor your parents incur any tax. Just make sure your family member donor completes the IRS Form 709 to keep a record for gifts that would be under the umbrella of the lifetime exclusion. Simple, neat and beneficial!