Withdrawing from the Bank of Mom and Dad can come in handy when you're buying a house and need extra funds for the down payment. You're not alone; 26 percent of all first-time home buyers got at least some of their down payment from a gift, according to the National Association of Realtors' 2011 Home Buyer Survey Results. The Internal Revenue Service admits that the gift tax issue is among the most complicated in the tax code, but tax implications vary between a gift and a loan. When tax time looms, take a deep breath and relax -- then be extra nice to your parents.
The down payment your parents give you is not considered taxable income on your tax return. Your mortgage lender may require written documentation to prove the money is a gift and not a loan, which would raise your debt load and make it more difficult for you to qualify for a mortgage. The letter should state the nature of your relationship, the property address and the gift amount. The letter must state the gift does not need to be repaid.
Gift Tax Exclusion
The IRS considers a gift to be a transfer of funds to an individual where full compensation is not received in return. As such, the gift can be subject to tax. Anyone could give a tax-free gift of up to $13,000 for the 2012 tax year without triggering a gift tax. That means each parent can gift you $13,000 each year, or $26,000 maximum, without tax implications.
Gift Tax Return
If your parents want to give you more than the combined $26,000 during a single tax year, the IRS requires that Form 709, United States Gift (And Generation-Skipping Transfer) Tax Return, be filed. However, this does not have to be done until the giver is deceased, at which time the first $1 million of all gifts made throughout the giver's lifetime is exempt from the tax.
If your parents loan you the money instead of giving it, the IRS requires that you document the loan, including interest, as though you were borrowing from a mortgage lender. The interest you pay on the loan is considered taxable income to your parents. Even if your parents don't charge you interest, the IRS might impose a reasonable interest rate on which your parents would have to pay tax. If you go this route, hire an attorney to help navigate the tax implications.
- Nolo's Essential Guide to Buying Your First Home; Ilona Bray, et al.
- Lenderama: NAR 2011 Home Buyer Survey Results -- First Time Home Buyer Statistics
- IRS: Frequently Asked Questions on Gift Taxes
- Forbes: Tax Free Gifting During 2012 ...
- IRS: Instructions for Form 709
- The Wall Street Journal: Tax Implications When Parents Gift Down Payment
- BananaStock/BananaStock/Getty Images
- The Disadvantages of Owner-Carried Mortgages
- Rent to Own vs. Owner Finance
- What Happens to the Excess Escrow Balance When Selling a House?
- What Choices Do I Have After Taking Out a Bad Car Loan?
- Do You Need an Appraisal on an Assumption?
- How to Accept a Final Offer When Selling a Home
- Do I Need to Write a Check for Earnest Money?
- How to Become a Homeowner With Limited Income
- Can I Refinance a Contract for Deed?
- What Is a Title II Mortgage?