Buying a home is a significant milestone, but saving for a down payment can be a daunting challenge. Fortunately, many first-time homebuyers receive financial assistance from family members, often in the form of a down payment gift. This article explores the intricacies of receiving a down payment gift from your parents, including tax implications, reporting requirements, and best practices.
Who Can Gift Money for a Mortgage Down Payment?
Most loan programs accept down payment gifts from immediate family members, including:
- Parents
- Grandparents
- Siblings
- Spouses
- Domestic partners
- Significant others (engaged to be married)
Some lenders may also allow gifts from non-relatives but it’s essential to check with your lender for their specific policies.
Tax Implications of Receiving a Down Payment Gift
While receiving a down payment gift is a generous gesture, it’s crucial to understand the potential tax implications. In 2024, you can receive a gift of up to $18,000 from an individual without incurring gift tax liability For married couples, the annual exclusion doubles to $36,000.
It is the donor’s responsibility to report the gift and possibly pay gift taxes if the gift amount surpasses the annual exclusion. The donor may, however, take advantage of their $13 lifetime gift and estate tax exemption. 61 million per person in 2024. Thanks to this exemption, people can give large gifts to others during their lifetime without having to pay taxes on them.
Reporting Requirements for Down Payment Gifts
If you receive a down payment gift exceeding the annual exclusion the donor must file IRS Form 709. This form reports the gift and ensures that the donor’s lifetime exemption is tracked. Even if the gift doesn’t trigger gift tax liability filing Form 709 is still mandatory.
Best Practices for Receiving a Down Payment Gift
When accepting a down payment gift, take into account these best practices to guarantee a seamless and legal process:
- Communicate with your lender: Inform your lender about the gift and inquire about their documentation requirements. Lenders often require a gift letter from the donor stating the gift amount, relationship to the recipient, and confirmation that the gift doesn’t need to be repaid.
- Maintain detailed records: Keep thorough documentation of the gift, including bank statements, gift letters, and any communication with the lender.
- Seek professional guidance: Consult with a tax advisor or financial planner to ensure you understand the tax implications and reporting requirements associated with the gift.
Additional Considerations
- Down payment requirements: The amount of the down payment gift may be limited by the loan program you choose. Conventional loans typically require a 20% down payment, while FHA loans allow for a down payment as low as 3.5%.
- Gift letter requirements: The gift letter should include specific details, such as the donor’s name, relationship to the recipient, gift amount, date of the gift, and confirmation that the gift is not a loan.
- Impact on your credit score: Receiving a down payment gift generally doesn’t directly impact your credit score. However, if you use the gift to purchase a home and take on a mortgage, your credit score may be affected by your payment history and credit utilization.
Receiving a down payment gift from your parents can significantly boost your homeownership dreams. By understanding the tax implications, reporting requirements, and best practices, you can navigate the process smoothly and ensure a successful home purchase. Remember to communicate effectively with your lender, maintain detailed records, and seek professional guidance if needed. With careful planning and preparation, you can leverage this generous gift to achieve your goal of homeownership.
Gifting a deposit If you are able to give your child cash to use as a deposit, you can simply put the money in their bank account. They can then put the cash gift down as a deposit and take out a mortgage in their own name to purchase the property.
Your child would be registered as the property’s owner at the Land Registry, required to pay the standard amount of Stamp Duty, and in charge of making mortgage payments. Your involvement as a financier would be over.
It could be a good idea to formalize the gift with a Deed of Gift, which proves that the deposit money was given as a gift rather than a loan. In fact, the lender of your child will require you to do so if they are also financing their purchase with a mortgage.
Gifting the growth in equity
Alternatively, you could try gifting a property to a family member. In this case, you would be the one to purchase the property under your own name and obtain the mortgage. In this scenario, you would be identified as the property’s owners on the Land Registry, and you could set up a Declaration of Trust giving your child partial or complete ownership of the equity. Then, if property values rise and/or the mortgage debt falls, the amount of equity might rise as well.
Giving a family member property in this manner can be very helpful, especially if your child doesn’t make enough money to be eligible for a mortgage. Whether or not your child would essentially have a “joint mortgage with parents” and contribute to the ongoing mortgage payments would then be a matter of mutual agreement between you and your child. However, since your child was not a party to the mortgage agreement, you would be considered to have made the payments. Your child would not lose out in this arrangement because there would be a Declaration of Trust in place proving that the increase in equity belongs to your child and not to you.
If you grant your child equity, the property cannot be sold until you sign the sale documents because your name is on the Land Registry. You therefore have more control. However, you will have to pay higher Stamp Duty Land Tax if you already own a property.
If your child lives with a partner who may or may not be purchasing the property with your child, then life becomes more complicated. We have solutions to these problems. Please click through to Cohabitation Agreements and Declarations of Trust.
Home Buying – Can my parents gift the down payment and the seller pay the closing costs?
FAQ
Can my parents give me money for a downpayment on a house?
Can my parents give me $100 000?
How much money can your parents give you for a house?
Do I have to report money my parents gave me?
Should parents gift money for a down payment?
As adult children look toward homeownership, some parents decide to gift money for a down payment to make this goal possible. Those who can comfortably make a down payment gift without sacrificing their own retirement may decide to help their kids become homeowners.
Do my parents owe a gift tax?
However, even though your parents are just doing something nice for you, federal tax law might require them to report the gift on a gift tax return or even pay gift taxes. In most cases, your parents won’t actually owe any taxes, but they might be required to file a gift tax return.
What if my parents give me money to pay my mortgage?
If they give the money to you and you pay the mortgage then it was you that paid it with your money. Either way it is a gift from your parents, but once the money is given to you, you can do anything you want with it including paying the mortgage, then the mortgage payment would all be in your name.
How much can a spouse gift a house to a child?
That means that you and your spouse can each gift up to $18,000 to anyone, including adult children, in general with no gift tax implications. For example, if your child purchases a home with a spouse, you and your spouse could each gift up to $18,000 to each of the buyers for a total of $72,000.