In 2021, the tax-free gift amount was $15,000. In 2022, that has risen by one thousand dollars, making the limit for tax-free gifts in 2022 a total of $16,000. Tax free means that no tax is due to the donor or the donee. There are provisions that would allow gifts higher than this amount providing the total lifetime gifts above the annual exclusion of $12.06 million for 2022 has not been met.
This is good news for homeowners – meaning that they can receive a monetary gift towards the down payment on a home. And, the donor and donee can be separate persons so that the aggregate tax-free gift for one-year amounts to more money. For instance, a father and mother can gift $16,000 each to their married son in 2022 and an additional $16,000 each to the daughter-in-law for a total $64,000.
In the case of a potential down payment on a home, depending on how recent the monetary gift occurred, the mortgage company might require a gift letter from the parents which states the amount was a gift and is not expected to be repaid. Lenders may ask the exact amount of the gift, where it came from and the relationship involved.
In some cases, a gift may be looked upon as an early inheritance which allows the recipient to show their gratitude, and gives the donor that opportunity to see the enjoyment and benefit of the gift firsthand. Family members and friends who have financial resources can also be a spark if you will, which allows buyers who have good credit and income the opportunity to purchase a home if they don’t have the funds for a down payment.
In a situation where the buyer does in fact have enough saved for a minimum down payment, gifting allows them to put more money down which may in turn assist with a lower interest rate or even eliminate the need for private mortgage insurance.
The most important thing when it comes to the involvement of gift funds is to have a complete disclosure with the lender. The best time for this discussion is during the pre-approval process. Your real estate professional should also know about it so they can guide you through the process.
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