Can My Parents Give Me a Deposit for a House? Exploring the Ins and Outs of Down Payment Gifts

Buying your first home is an exciting milestone but saving up enough money for a down payment can be challenging. With home prices on the rise many first-time buyers turn to family members for financial help with their down payment. If your parents have offered to gift you money to put toward a house, you likely have questions about the logistics and legalities involved. Here’s what to know if you’re considering accepting a down payment gift.

How Much Can My Parents Gift Me Tax-Free?

The IRS allows individuals to give up to $16,000 per year (in 2023) to as many people as they want without any gift tax implications. Married couples can give up to $32,000 tax-free. This annual exclusion means your parents can gift you up to that amount every year for a home down payment without reporting it or worrying about gift taxes.

Gifts above $16,000 require the giver to file a gift tax return but likely won’t incur any actual gift tax. Each person has a lifetime gift and estate tax exemption, which is $12.06 million for 2023. Only amounts gifted above that threshold are subject to gift tax. So unless your parents have already gifted millions, they likely won’t owe any taxes on a down payment gift.

Do I Need to Report Gifted Down Payment Funds on My Taxes?

No, gifts are not considered taxable income for the recipient, so you do not need to claim the down payment money from your parents on your own taxes. As the recipient, you have zero reporting requirements.

Will a Down Payment Gift Affect My Ability to Qualify for a Mortgage?

Lenders will want to verify any large deposits to your bank accounts, so you will need a paper trail showing the down payment money was truly a gift and not a loan that needs to be repaid. Most lenders require a gift letter signed by the donor. This letter should specify who gifted the funds, the amount, and that the funds do not need to be repaid.

Provided you have this documentation, a down payment gift should not negatively affect your ability to qualify for a mortgage assuming you still meet the lender’s debt-to-income and credit requirements. The gifted funds can generally be used for your entire down payment if buying a primary residence.

Are There Rules for Down Payment Gifts on a Mortgage?

Here are some key mortgage rules to know if using gifted down payment funds:

• The gift must be from a permissible source – typically a family member, fiancé, or domestic partner.
• The gift letter must prove the funds do not need to be repaid.
• If the funds have been in your account less than 60 days, the lender may request additional verification from the donor’s account.
• For conventional loans, proof of transfer is required such as a withdrawal receipt, deposit slip, or wire transfer confirmation.

Always communicate with your loan officer to ensure you properly document any down payment gifts.

What If My Parents Want to Gift Me More Than the Annual Exclusion Amount?

If your parents intend to gift you more than the annual exclusion amount and avoid gift taxes, they have a few options:

• Split the gift over multiple years – They can gift up to the annual limit each year until they reach the desired total gift amount,

• Use the gift against their lifetime exemption. As we already said, each person has a $12 06 million lifetime gift and estate tax exemption. Any gifts over the annual exclusion limit only lower the exemption that can be used.

• Pay the applicable gift taxes – For substantial single gifts that exceed the remaining lifetime exemption, the donor will owe gift taxes at a rate of up to 40% in 2023.

• Provide the money as a no-interest loan – Structuring the funds as a loan avoids gift taxes. Your parents should charge at least the AFR interest rate and document the loan terms to qualify.

Your parents can give you more than the annual limit as long as they don’t go over their lifetime exemption amount. They just need to plan ahead and file the necessary gift tax return. Consult a tax professional for guidance on gift tax rules.

What Else Should I Consider When Accepting a Down Payment Gift?

Before accepting a sizable down payment gift, think carefully about a few things:

• Make sure your parents can afford it without jeopardizing their own retirement. Don’t feel guilty accepting the gift if they offer and can manage it, but have an open conversation about their financial situation.

• Discuss expectations regarding repayment or future assistance with mortgage payments in case of financial hardship. Outline the terms of any loan.

• Maintain full transparency with your mortgage lender and provide necessary gift documentation.

• Consult a tax pro as needed about properly documenting the gift if it exceeds the annual exclusion.

• Review how the gift may impact any future Medicaid eligibility for your parents. Large gifts in the prior five years can cause issues.

Accepting a down payment gift from family can be a huge blessing if you plan ahead and keep the right paperwork. Before you move forward, make sure your parents really want to help you.

Key Takeaways on Down Payment Gifts

• Individuals can gift up to the annual exclusion limit ($16,000 in 2023) without filing a gift tax return.

• Lenders will require a gift letter proving the down payment funds were a gift, not a loan.

• Any down payment gifts that are more than the annual exclusion must be reported on a gift tax return, but they probably won’t be taxed as gifts.

• Consider your parents’ financial situation and have clear expectations about repayment terms before accepting a sizable gift.

Accepting money from a family member to put toward your first home can help make homeownership possible. Make sure all parties feel comfortable with the arrangement and understand the tax and mortgage implications involved. With proper planning and documentation, a down payment gift can be a win-win situation for both you and your generous parents.