Many families who purchase homes receive help from their close relatives. In fact, the National Association of Realtors found that 25 percent of buyers who were surveyed relied on cash gifts from family members to close on their properties from July 2011 to June 2012.
The Internal Revenue Service has raised the 2013 cash gift threshold to $14,000, meaning that an individual can give up to that yearly limit to another person without having to pay gift tax, reports Forbes. Married couples can jointly gift up to $26,000 to each adult child, his or her spouse, and their children. Gifts that exceed this $14,000 limit count against the lifetime exclusion of $5.12 million or $10.24 million for married couples. A couple with one married child who has two children can, for example, gift up to $104,000 and not get hit with the gift tax.
Lenders do scrutinize cash gifts, so homebuyers should follow specific guidelines and understand possible tax consequences. Here are some basic rules to consider, furnished by The Mortgage Reports:
- Write a gift letter for the lender that includes the exact dollar amount of the gift, subject property address, relationship of the gifter to the giftee, and a note that the gift is not a loan.
- Ensure a clear paper trail by documenting the receipt and application of gift funds.
- Understand gift tax rules and how they may affect your situation by consulting with your tax advisor or the IRS.