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Tax Implications of Gifts for Real Estate Purchases

May 12, 2023

Gifting funds to a relative for buying a home is a generous act that can help loved ones achieve their dream of homeownership. However, it’s important to understand the tax implications of these gifts to avoid any unexpected tax burdens. Here’s what you need to know about the tax issues of a gift given for buying real estate.

What happens in a standard mortgage-financed purchase of real estate?

In purchase transactions with a mortgage, a buyers puts down a certain percentage of the sale price of the home. The down payment usually comes out of checking, savings or invested assets.

For example. John and Peggy are buying a home for $300,000. They will be putting 5% down and the source of the funds will be from checking and finance roughly $285,000.

We have excluded closing costs and prepaids for clarity of the example.

Closing costs are hard costs like underwriting, credit report, appraisal and title costs associated with getting a mortgage.

Prepaids are funds presented in advance for taxes and insurance associated with the continued ownership of the home.

When is a gift taxable?

In almost all cases, a gift of funds for buying a home is not taxable. There is a dollar amount the IRS says before the gift needs to be reported.

This threshold gets confused with actually paying a tax. As of 2023, it is $17,000 that can be gifted before a form needs to be completed.

If a gift exceeds an annual amount, then IRS form 709 needs to be filed.

Types of gifts for mortgage assistance

There are three types of gifts that can be given to assist with the home-buying process:

  1. Down Payment Gift:This is a type of gift is given to a borrower to help them pay the down payment for their home. It can be given by a family member or close friend and used in combination with the borrower’s own savings. It’s crucial to have proper documentation to support the gift.
  2. Closing Cost Gift: is a monetary gift given to a borrower. It helps them pay for costs related to getting a mortgage, such as appraisal fees, title insurance, and attorney fees. This gift can also be given by a family member or close friend.
  3. Gifting Equity: This is a type of gift where the gift is part of the equity in the home. This is called a “gift of equity” purchase. This is where a person sells a home and gifts part of the home to help with the down payment.
    For example:
    Mom and Dad sell their son a home worth $300,000 for $240,000.
    Instead of a cash down payment, they gift $60,000 of equity.

Tax reporting requirements for gifts

The maximum gift allowable for 2023 is $17,000 per individual before any reporting to the IRS is triggered. Gifts greater than $17,000 in 2023 require completion of IRS Form 709. This form must be reported to the IRS with the amount gifted exceeding the annual maximum.

The gift exceeding the annual limit of $17,000. This would reduce the taxpayer’s lifetime exclusion amount of $12.9 million. An income tax burden would not be calculated until the lifetime exclusion of $12.9 million is exhausted.

In conclusion, gifting funds for a real estate purchase can be a great way to help loved ones. It’s important to understand the tax implications.

Follow the tax reporting guidelines. Gifts given for real estate purchases typically do not result in any taxes. This applies to both the giver and receiver.

Gift of Equity Purchase: How to Sell Your Home to a Relative with No Money Down

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