When receiving a gift of money to help with a mortgage down payment, it’s important to understand the tax implications. Whether or not the gift needs to be reported to the IRS depends on the amount of the gift.
Gift Tax Exclusion
In 2023, the annual gift tax exclusion is $17,000 per person. This means that you can receive up to $17,000 from any one person in a year without having to pay gift tax. If you receive more than $17,000 from a single person in a year, the excess amount is subject to gift tax.
Reporting Gift Letters
Mortgage gift letters are typically not reported to the IRS. However, if the gift exceeds the annual gift tax exclusion, the donor is required to file a gift tax return (Form 709). The donor is responsible for paying any gift tax due.
Gift Tax Consequences for the Recipient
The recipient of a gift is not responsible for paying gift tax. However, if the gift is used to purchase a home, the recipient may need to pay capital gains tax when they sell the home. Capital gains tax is the tax on the profit from the sale of an asset.
Other Considerations
In addition to the gift tax exclusion, there are a few other things to keep in mind when receiving a mortgage gift:
- The gift must be a bona fide gift. The donor cannot expect anything in return for the gift.
- The gift must be documented. A gift letter is a common way to document a mortgage gift.
- The gift may affect your mortgage application. Lenders may consider the gift as part of your income when determining your eligibility for a mortgage.
Whether or not a mortgage gift letter gets reported to the IRS depends on the amount of the gift. Gifts up to the annual gift tax exclusion do not need to be reported. However, if the gift exceeds the exclusion, the donor is required to file a gift tax return. The recipient of the gift is not responsible for paying gift tax, but may need to pay capital gains tax when they sell the home.
What is a Mortgage Gift Letter
FAQ
What are the risks of signing a gift letter?
How does the IRS know if I give a gift?
Is a mortgage gift letter legally binding?
Does the recipient of a cash gift have to report it to the IRS?
Will a mortgage gift letter be reported to the IRS?
A mortgage gift letter that shows a gift of less than $17,000 might not be reported to the IRS. That’s because any gift below the $17,000 limit will not incur the gift tax. However, gift letters that involve a gift of more than $17,000 will likely be reported to the IRS. With that, the involved parties should be prepared to cover the gift tax.
What happens if you pay back a mortgage gift letter?
If you pay back a gift down payment, after a gift letter explicitly stated that you would not, that will constitute mortgage fraud. With that, your home loan may be at risk. Does a mortgage gift letter get reported to the IRS? A mortgage gift letter that shows a gift of less than $17,000 might not be reported to the IRS.
Do you need a gift letter to get a mortgage?
When you apply for a mortgage, lenders need to know the money you use for your down payment is yours, and not an undisclosed loan. You’ll need to get a gift letter from the person who gives you money. A gift letter assures your lender that the sudden influx of cash in your account is a gift and not a loan.
Are gift letters tax deductible?
However, gift letters that involve a gift of more than $17,000 will likely be reported to the IRS. With that, the involved parties should be prepared to cover the gift tax. Keep in mind that the limit will change each year. Are there tax consequences for giving down payment gifts?