Helping a relative buy a home is a wonderful thing to do. Many loan programs allow down payment gifts to help a credit worthy borrower qualify. As you help a loved one out, though, you probably wonder if there’s any tax benefit for you.
Unfortunately, there are not any tax benefits. Gifts for a down payment are not considered a true ‘charitable donation.’ So while you are a good person for helping your loved one out, you won’t decrease your tax liability as a result of it.
In fact, you might want to watch just how much you give your child or other relative. Each year, the IRS sets maximum gift amounts that remain tax-free. If you go above that amount, your gift could become taxable and on the part of the donor, not the recipient.
The Gift Limits
As of 2018, the maximum amount you can gift a person is $15,000. This limit is higher than it’s been since 2013, where it was stuck at $14,000.
However, there’s a trick you can use here. If you are married and file your taxes married filing joint, both you and your spouse can give a gift of $14,000 to one person. This means that you can give one child a total of $30,000 and not get taxed.
That’s great news, but there’s even better news. Assuming you are in the position to be able to donate money to more than one child or relative, you can and still remain tax-free. You and your spouse can each provide a person with $15,000 for a total donation of $30,000. There is no limit as to how many people you can provide this gift to in one year.
Who Can You Give a Gift To?
The biggest question is who do lenders let borrowers receive gifts from to buy a house? Typically, it’s reserved for family members. This could be relatives by blood or marriage. In some cases, it can even be a close friend as long as you can document the length of the friendship. In other words, it can’t be someone you met last year.
In some cases, you can receive a gift from your employer or a charitable organization as well. You just have to talk to your lender to make sure it’s an acceptable source. Most conventional and government-backed programs allow this, but certain lenders may restrict who gives you the money.
How Much Can you Receive?
Finally, you probably want to know how much of a gift you can receive from a loved one? Again, it varies by program and lender. In general, though, you can receive the following gifts:
- Conventional loans – Your entire down payment can be a gift as long as it is properly documented. The donor must be able to document where the funds originated and you must be able to document receipt and deposit of the funds.
- FHA loans – You can also receive 100% of your down payment as a gift as long as your credit score is higher than 620. If your credit score is less than 620, you will have to put 3.5% of your own funds towards the down payment. In this case, the gift would be less crucial because that is the minimum FHA down payment; however, you may be able to use the funds towards your closing costs.
Properly Tracking the Gifts
The most important thing you can do is properly track the receipt of the gift funds. In fact, it starts with the donor. He cannot just come up with say, $20,000 and give it to you. He will have to show the lender where the funds originated. If they were from his savings account or other investment vehicle, the last two months’ of bank statements usually suffice.
If the donor sells an asset to get the funds, he will have to document the sale and the receipt of the funds. This is all to help the lender understand that the funds were not a loan that the borrower is trying to hide by taking the funds from a potential ‘donor.’
Once you receive the funds, you must document the receipt by properly depositing the funds in your chosen account. This should be the account you will use to pay all of your down payment and closing fees. You will need the deposit ticket and your bank statement to show the lender receipt of the funds.
In the end, a gift for a down payment or closing costs can really help you get the house you want. Make sure you talk to your lender before you receive any gifts to make sure you go about it the right way. With no tax implications on gifts less than $15,000, you are in good shape to get the help you need.