Untangling the gifted down payment puzzle…

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If you want to buy a home, are short on down payment funds, and have a relative with the money and the desire to help you, it’s time to celebrate! However, you will need to follow a few rules.

First, the IRS: Under current Federal tax laws, any individual can give any other individual up to $15,000 per year without being subject to a gift tax. And yes, it’s the giver who pays the tax, if any, not the recipient.

What that means to you is that Grandma and Grandpa can each give you and your spouse $15,000 to go toward that down payment. That’s $60,000. If that isn’t enough, they can give you more without being subject to gift tax, but they will have to file IRS Form 709 to disclose the gift. The excess will then count toward a lifetime maximum that presently stands at $11.4 million.

Should the gifts exceed $11.4 million the giver would be subject to a tax of anywhere from 18% to 40%.

It is important for givers to disclose any gifts in excess of $15,000 to any one individual. If they fail to file the gift tax return, then the IRS can and likely will assess a gift tax, plus penalties and interest.

As far as the IRS is concerned, you could receive gifts from any number of people, as long as they follow the rules.

Banks have their own set of rules regarding gifted down payments.

First, the giver must be a relative. It can be a parent, grandparent, sibling, or spouse.  If you are engaged to be married, your significant other can also give you $15,000.

Next, you will have to write a gift letter to the lender, providing detailed documentation regarding the gift. That would include the name of the donor, their relationship to you, the date and amount of the gift, and bank records showing the deposited funds. The giver will also need to make a written statement verifying that the money was a gift and they have no expectation of repayment.

Banks have always wanted assurance that no part of your down payment was borrowed funds. Thus, they might also require documentation showing that the gift money was “seasoned.”

If you anticipate receiving a gift (or gifts) for your down payment, discuss the issue with your lender.

Different loan programs have different rules that you must follow. In general, if you are putting down 20% or more of the purchase price, the money can all be gifted. If you’re paying less than 20% down, you may have to show that a portion of the down payment is your own money.

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