Rules for Gifting Money for a Mortgage to a Relative

Being too generous might cost you.
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If you have some money saved and a relative is trying to buy a home, you might be tempted to help out. Maybe you know that if your sister could just come up with an additional $15,000 for her down payment, she could avoid the added expense of private mortgage insurance. You can give her the $15,000, but it will have tax consequences -- and the lender probably has a few rules as well.

The Gift Tax

The Internal Revenue Service doesn't allow you to give limitless money away, even if you can afford it. The IRS collects its revenue from both individual taxpayers and their estates when they die, so it's in the government's best interest that you don't give away so much money during your lifetime that there's nothing left of your estate to tax. The IRS allows you to give away only $13,000 per person each tax year as of 2012 without incurring gift tax. If you give your sister $15,000, you'll be liable for tax on $2,000 of the money. If you're married, you and your spouse can give $13,000 each before worrying about the gift tax, so the $15,000 would be covered with room to spare.

Lending Vs. Giving

The gift tax doesn't apply if you receive something in exchange for your money. You could make a long-term loan to your relative, such as by asking her to pay the $15,000 back over 30 years. Her monthly payments would be negligible – about $41 a month for the principal balance. There's a catch to this approach, however. For the IRS to exclude the money as a gift, you must charge your relative interest, and it must be at the current market rate at the time you make the loan. You also can't avoid the gift tax by making mortgage payments for your relative, rather than a lump sum toward her down payment. If the mortgage is in her name and you make any payments on her behalf, the IRS considers this money a gift.

The Unified Credit

If you give your relative $15,000, you can either pay the gift tax on the extra $2,000 at tax time, or you can use something called the "unified tax credit" to exempt the $2,000 from taxation. Your lifetime unified credit is equal to the estate tax exemption in any given year – $5.12 million as of 2012. If you use $2,000 to exempt the taxable portion of your gift to your relative, it counts toward your estate's $5.12 million exemption at your death. In other words, your estate would only be able to exempt $5.12 million minus $2,000 from taxation; it would have to pay taxes on any value over that amount. As long as the estate tax exemption is set at $5.12 million, $2,000 is a drop in the bucket, so you may not think twice about taking this option. However, every time you use the unified credit over your lifetime, it deducts a little more from your estate's exemption, which might be of concern if you expect your estate to be large.

Lender Rules

Mortgage lenders – particularly those who make FHA loans – have a few rules regarding money you give your relative for a down payment as well. Cash gifts from relatives are usually OK, unless you're in the real estate business and benefit financially from your relative's transaction. If you're the agent or broker, if you built the property, or if you're actually selling the home to your relative, your money is off-limits for use as a down payment.

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