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.
When is a gift taxable?
In almost all cases, a gift of funds for buying a home is not taxable. However, confusion arises when it comes to determining when tax reporting is required based on the amount of the gift.
Types of gifts for mortgage assistance
There are three types of gifts that can be given to assist with the home-buying process:
- Down Payment Gift: This is a gift of funds given to a borrower to assist with the down payment on a 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 satisfactory documentation to support the gift.
- Closing Cost Gift: A monetary gift given to a borrower to help cover the costs associated with closing on a home, such as appraisal fees, title insurance, and attorney fees. This gift can also be given by a family member or close friend.
- Gifting Equity: In a gift of equity purchase, a person sells a home to a relative and gifts part of the equity to help with the down payment. For instance, Mom and Dad sell a home worth $300,000 to their son for $240,000 and gift $60,000 of equity instead of making a cash down payment.
Tax reporting requirements for gifts
The maximum gift allowable for 2023 is $17,000 per individual before any reporting to the IRS is triggered. If a gift is greater than $17,000 in 2023, the individual making the gift is required to complete Form 709 and report the amount gifted in excess of the $17,000 annual maximum with the IRS. The amount of the gift in excess of the annual $17,000 max would begin reducing 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, while gifting funds for a real estate purchase can be a great way to help loved ones, it’s important to understand the tax implications. By following the tax reporting guidelines, most gifts given for the purpose of buying real estate will not result in any tax burden for the giver or receiver.
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