When Grandma, or any other family member, wants to provide the funds for the down payment on your new Pittsburg, CA home, you’re a fortunate individual. However, you and Grandma have rules to follow.
These rules come from two sources: Your mortgage lender and the Internal Revenue Service.
First, your lender: The rules will change depending upon the kind of loan you qualify for and the amount of the down payment. Some loan programs require that you furnish some of the funds from your own pocket. Other programs, generally with a 20% down payment, will allow all of the funds to be gifted.
Note that for mortgage loan purposes, the gift must come from a family member or from someone to whom you are engaged to be married.
Note also that the gift must be well-documented and accompanied by a gift letter. The gift letter must state that the giver does not expect repayment, ever. The giver may also be required to show that he or she “owns” the money given. It can’t come from borrowed funds.
Then there’s the IRS. Under the Gift Tax rules it is the giver, not the receiver, who could be liable for taxation. That seems a little odd, but there it is.
The IRS, by the way, doesn’t care who gives you money. It’s only the lender who insists that it must come from a family member.
Any individual may give any other individual up to $15,000 per year without having to report the gift or pay taxes. That means that if you’re married, Grandma could give you and your spouse each $15,000. So could Grandpa, Mom, Dad, or any of your siblings.
But let’s say there’s only Grandma with the funds to help, and you and your spouse need more than $30,000.
It turns out that she can give you more without having to pay tax on the gift. The catch is that she’ll have to file form 790 to disclose the gift. From there, the gift will count toward a lifetime cap of $11.4 million that can be given tax-free.
If Grandma wants to give you the funds for the down payment, first get all the rules from your lender. Then go along with her to speak with her tax advisor, so you both understand how to follow the rules that will eliminate any tax liability.
Then remember to give thanks for your good fortune in having someone who loves you enough to make such a gift.
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