I am not a tax advisor. But many clients have questions about how gifts both affect their mortgage application and their taxes. I am happy to explain:
- Gift amounts
There is no limit to the amount of the gift. You may receive multiple gifts from multiple sources.
2. Gift sources
- A gift can be provided by a relative, defined as the borrower’s spouse, child, or other dependent, or by any other individual who is related to the borrower by blood, marriage, adoption, or legal guardianship; or
- a fiancé, fiancée, or domestic partner.
- The donor may not be, or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction.
3. Tax consequences
There are no federal income taxes paid by the recipient upon receipt of the gift. Many clients ask about estate taxes. A person may give another person $5.49MM (as of 2017) through their estate without incurring any estate tax. If the deceased’s contribution to any one person is in excess of that limit, then estate taxes are paid upon their passing for the excess amount. If during the deceased’s lifetime, they gave more than $14,000 in any given year to another person, then the $5.49MM exemption is reduced. For instance if you received $114,000 as a gift for your home purchase, then the estate exemption would be reduced to $5.39MM upon that donor’s passing.
So for many families – who do not expect to receive an inheritance in excess of the lifetime exemption – receiving a gift larger than $14,000 won’t have an effect on federal income taxes.
4. Documenting the transfer of a gift
For conventional and VA loans we are required to document the proof of transfer from the donor. Cash is never acceptable.
1. Personal check: If the gift is via a personal check, we need the ‘canceled check’ from the donor. This is a double sided stamped copy of the check showing it cleared. The donor (and only the donor) can access this document from their bank through online banking. A gift recipient doesn’t have access to this document.
2. Wire: If the funds are wired we need the donor’s wire confirmation which they receive from their bank.
3. Certified or Cashier’s check: We need a copy of check and the donor’s bank statement showing it clearing.
For FHA financing, we always need in addition to the above documents, proof the donor has the ability to give. So we will also need their bank statement. Remember, cash is never acceptable or usable.