Having parents who can assist you with a down payment for your home can be a huge help when making the jump from renting to owning. Even a few thousand dollars can be a substantial help to get approved for a mortgage. However, even though your parents are just doing something nice for you, federal tax law might require them to report the gift on a gift tax return or even pay gift taxes. In most cases, your parents won’t actually owe any taxes, but they might be required to file a gift tax return.
TL;DR (Too Long; Didn't Read)
If your parents give you a down payment for your home, it won't be taxable income to you, but it may be a gift tax to them.
Potential for Gift Taxes on Parents
The federal government usually requires taxpayers to file a gift tax when people give money to others, but there are a few exceptions. First, only gifts in excess of the annual exclusion must be reported. For 2019, the annual exclusion is $15,000 per person. So, if your mom gives you $15,000 and your dad gives you $15,000, for a total of $30,000, neither of your parents are required to file a gift tax return because they are both at or below the annual gift exclusion.
If the gift exceeds the annual exclusion, your parents need to file a gift tax return. However, that doesn’t mean they’ll actually owe any taxes. That’s because the IRS allows a lifetime exemption that has to be exhausted before any gift or estate taxes are owed. The current exemption allows someone to give away $11.4 million during their life and at death before incurring any gift taxes or estate taxes, so the vast majority of people won’t owe any taxes on the gift.
For example, say your parents give you $50,000. After using up both parents’ annual exclusions, they’ve made a $20,000 taxable gift to you. Assuming it’s split evenly, they would file a gift tax return reporting that they made a $10,000 taxable gift each. If they haven’t made any prior taxable gifts, each uses $10,000 of their lifetime exemption so they only have $11.39 million remaining, but they won’t owe any taxes.
No Taxes for Recipient
As long as your parents pay any applicable gift taxes on the money they gave you to help with your down payment, you won’t owe any taxes on the gift. If your parents had been extremely generous and had already used up their lifetime exemptions, but didn’t pay the resulting gift tax, the IRS could come after you for the gift tax due.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."