Gifting a down payment/avoiding gift tax

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Dogsplaypoker
Posts: 14
Joined: Mon Jan 09, 2017 11:21 pm

Gifting a down payment/avoiding gift tax

Post by Dogsplaypoker » Fri Apr 28, 2017 5:22 pm

Simple question, my son is taking a home mortgage loan out with a lender for ~250-275k. He is a first time home buyer. I'd like to help him with a generous down payment of say 80-100k.
How can I avoid gift tax on this?
I can wire transfer straight to the title/escrow company and the gift is not reportable by the lender. But from my understanding I am still obligated to report this when I do my personal taxes.
Any help or advice on how or if I can avoid the gift tax is appreciated thank you.

IowaFarmBoy
Posts: 535
Joined: Fri Jan 22, 2010 8:19 am

Re: Gifting a down payment/avoiding gift tax

Post by IowaFarmBoy » Fri Apr 28, 2017 5:32 pm

I don't think there is a lot you can do. If you and he are both married, you and your spouse could each give $14,000 to both him and his spouse. That would cover $56,000. This should get him to a 20% downpayment and thus avoid PMI which is a very good thing. If you want, you could do up to the same amount next year and he could pay down his mortgage. It wouldn't drop his payment but it would get him paid off much sooner.

I've never done the reporting process but my perception is that it isn't too rough to do. No tax due now and probably never unless your estate is large.

KlangFool
Posts: 9472
Joined: Sat Oct 11, 2008 12:35 pm

Re: Gifting a down payment/avoiding gift tax

Post by KlangFool » Fri Apr 28, 2017 5:32 pm

Dogsplaypoker wrote:Simple question, my son is taking a home mortgage loan out with a lender for ~250-275k. He is a first time home buyer. I'd like to help him with a generous down payment of say 80-100k.
How can I avoid gift tax on this?
I can wire transfer straight to the title/escrow company and the gift is not reportable by the lender. But from my understanding I am still obligated to report this when I do my personal taxes.
Any help or advice on how or if I can avoid the gift tax is appreciated thank you.
Dogsplaypoker,

<<I'd like to help him with a generous down payment of say 80-100k.>>

Why do you think you are helping him by doing this? Can he buy the house with his own money?

A) If the answer is yes, why are you doing this? He can take a mortgage and you can give him 14K every year to pay off the loan.

B) If the answer is no, why are you paying for a house that he cannot afford on his own? Can he sustain his lifestyle with his income in this neighborhood? If the answer is no, are you going to support him for the rest of his life?

I had seen too many generous parents get their children into a house and lifestyle that the children cannot afford. The story usually does not end well.

KlangFool
Last edited by KlangFool on Fri Apr 28, 2017 5:36 pm, edited 2 times in total.

Gill
Posts: 4462
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Gifting a down payment/avoiding gift tax

Post by Gill » Fri Apr 28, 2017 5:33 pm

Do you anticipate your total assets will ever exceed $5 million? If not, just write a check and file IRS Form 709. There won't be any tax due.
Gill

jebmke
Posts: 8144
Joined: Thu Apr 05, 2007 2:44 pm

Re: Gifting a down payment/avoiding gift tax

Post by jebmke » Fri Apr 28, 2017 5:34 pm

Don't some lender have restrictions on the source of down payments?
When you discover that you are riding a dead horse, the best strategy is to dismount.

Exodus
Posts: 42
Joined: Mon Apr 18, 2016 1:59 pm

Re: Gifting a down payment/avoiding gift tax

Post by Exodus » Fri Apr 28, 2017 5:56 pm

If you are worried about paying tax on that $80-100K you will just have to report it, but you won't pay taxes on it. The lifetime gift tax exemption is 5M.
The outcome is the perspective

Gill
Posts: 4462
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Gifting a down payment/avoiding gift tax

Post by Gill » Fri Apr 28, 2017 5:59 pm

jebmke wrote:Don't some lender have restrictions on the source of down payments?
They don't have restrictions but they want assurances it is a gift and not a loan.
Gill

User avatar
celia
Posts: 8075
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Gifting a down payment/avoiding gift tax

Post by celia » Fri Apr 28, 2017 6:32 pm

Exodus wrote:If you are worried about paying tax on that $80-100K you will just have to report it, but you won't pay taxes on it. The lifetime gift tax exemption is 5M.
Currently the gift tax exemption is $5.45M. If you give any annual gifts over today's annual limit of $14,000 per person, the excess amount will be subtracted from the gift tax exemption that is in effect the year you die.
http://law.freeadvice.com/tax_law/gift_tax_law/gift.htm

Why don't you (and your spouse separately, if applicable) give $14K to them first. Then report the excess on Form 709.

walker46
Posts: 52
Joined: Wed Jan 05, 2011 9:06 am

Re: Gifting a down payment/avoiding gift tax

Post by walker46 » Fri Apr 28, 2017 6:42 pm

Exodus wrote:If you are worried about paying tax on that $80-100K you will just have to report it, but you won't pay taxes on it. The lifetime gift tax exemption is 5M.
THIS. Actually the lifetime exemption right now I believe is $5,490,000. That number is the current exemption on the federal estate tax. So what happens is that any gift access you give in any year in excess of $14,000 lowers your estate tax exemption by that amount. For example, if you gave your son $114,000 to pay towards the house, your estate tax exemption would be lowered to $5,390,000. In a sense the gift you give now is treated as an early inheritance to your son. IRS Form 709 is how the IRS tracks this but nothing happens until you die or your total gifts exceed $5,490,000. There is no gift or inheritance tax until your total gifts (less the annual $14K exemptions) and estate total are over the $5.49 million exemption amount.

We just researched this ourselves because we just bought a condo for our disabled son and needed to know how the gift tax worked. I'd recommend downloading IRS Form 709 along with its instructions. That will be more authoritative and probably clearer than my one paragraph explanation and example.

mortfree
Posts: 1129
Joined: Mon Sep 12, 2016 7:06 pm

Re: Gifting a down payment/avoiding gift tax

Post by mortfree » Fri Apr 28, 2017 6:51 pm

walker46 wrote:
Exodus wrote:If you are worried about paying tax on that $80-100K you will just have to report it, but you won't pay taxes on it. The lifetime gift tax exemption is 5M.
THIS. Actually the lifetime exemption right now I believe is $5,490,000. That number is the current exemption on the federal estate tax. So what happens is that any gift access you give in any year in excess of $14,000 lowers your estate tax exemption by that amount. For example, if you gave your son $114,000 to pay towards the house, your estate tax exemption would be lowered to $5,390,000. In a sense the gift you give now is treated as an early inheritance to your son. IRS Form 709 is how the IRS tracks this but nothing happens until you die or your total gifts exceed $5,490,000. There is no gift or inheritance tax until your total gifts (less the annual $14K exemptions) and estate total are over the $5.49 million exemption amount.

We just researched this ourselves because we just bought a condo for our disabled son and needed to know how the gift tax worked. I'd recommend downloading IRS Form 709 along with its instructions. That will be more authoritative and probably clearer than my one paragraph explanation and example.
Be cautious with the math.

You give your son 14k
Your wife gives your son 14k
You give daughter-in-law 14k
Your wife gives her 14k.

Total Gift minus 56k would be what you'd have to report to the IRS. I am NOT a tax expert but that is what I was seeing some others saying above.

User avatar
LadyGeek
Site Admin
Posts: 46745
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Gifting a down payment/avoiding gift tax

Post by LadyGeek » Fri Apr 28, 2017 7:24 pm

This thread is now in the Personal Finance (Not Investing) forum (taxes).

I want to address several comments related to avoiding gift tax. For the record, discussions of dishonest behavior or bypassing the law are totally unacceptable.

The intent is to understand how to do this within the existing legal framework; in which case this discussion can continue.

Everything is a matter of degree. The choice of using a tax deferred account, e.g. IRA, to avoid taxes during some period of time is one extreme, managing assets to qualify for Medicaid is the other. Gifting assets to avoid taxes is somewhere in the middle. The bottom line is to work within the legal framework. Ethics is the ever present elephant in the room.

The approach is to educate members on how to do things legally. State your points in a factual manner. If the intent strays from this objective, please report the post and we'll investigate.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Gill
Posts: 4462
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Gifting a down payment/avoiding gift tax

Post by Gill » Fri Apr 28, 2017 8:24 pm

LadyGeek wrote:This thread is now in the Personal Finance (Not Investing) forum (taxes).

I want to address several comments related to avoiding gift tax. For the record, discussions of dishonest behavior or bypassing the law are totally unacceptable.

The intent is to understand how to do this within the existing legal framework; in which case this discussion can continue.

Everything is a matter of degree. The choice of using a tax deferred account, e.g. IRA, to avoid taxes during some period of time is one extreme, managing assets to qualify for Medicaid is the other. Gifting assets to avoid taxes is somewhere in the middle. The bottom line is to work within the legal framework. Ethics is the ever present elephant in the room.

The approach is to educate members on how to do things legally. State your points in a factual manner. If the intent strays from this objective, please report the post and we'll investigate.
Sorry, but I'm a bit confused. Are you addressing comments in this thread or other discussions relating to taxes? I haven't seen any discussion of tax evasion. Discussions of tax avoidance are perfectly legitimate activities.
Gill

Dogsplaypoker
Posts: 14
Joined: Mon Jan 09, 2017 11:21 pm

Re: Gifting a down payment/avoiding gift tax

Post by Dogsplaypoker » Fri Apr 28, 2017 8:27 pm

Yes thank you, correctly stated I am not seeking to avoid the law or federal regulations. Simple asking for financial advice on how to best handle the tax claims/laws. All advice was very useful, thank you very much.

Dogsplaypoker
Posts: 14
Joined: Mon Jan 09, 2017 11:21 pm

Re: Gifting a down payment/avoiding gift tax

Post by Dogsplaypoker » Fri Apr 28, 2017 8:28 pm

Gill your advice was very useful among others. Thank you especially :happy

Gill
Posts: 4462
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Gifting a down payment/avoiding gift tax

Post by Gill » Fri Apr 28, 2017 8:40 pm

Dogsplaypoker wrote:Gill your advice was very useful among others. Thank you especially :happy
You're very welcome. Bottom line is, except for individuals with very large estates, the gift tax is a nonissue. Regardless, there is no tax to be paid until your lifetime gifts are well over $5 million and it doesn't sound as if that is your situation.
Gill

User avatar
JonnyDVM
Posts: 1592
Joined: Wed Feb 12, 2014 6:51 pm
Location: Atlanta, GA

Re: Gifting a down payment/avoiding gift tax

Post by JonnyDVM » Fri Apr 28, 2017 8:57 pm

That's very generous of you. The answer has already been given but your best way is doing this over two years. 56k 2017, and the rest in 2018.

Edit. Oh I just learned something. It really doesn't matter going over the 14k limit. Unless you plan on approaching the 5 million dollar lifetime limit. Didn't know that. And might I add, that limit is absurd.
Last edited by JonnyDVM on Fri Apr 28, 2017 9:04 pm, edited 1 time in total.
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

Gill
Posts: 4462
Joined: Sun Mar 04, 2007 8:38 pm
Location: Florida

Re: Gifting a down payment/avoiding gift tax

Post by Gill » Fri Apr 28, 2017 9:02 pm

JonnyDVM wrote:That's very generous of you. The answer has already been given but your best way is doing this over two years. 56k 2017, and the rest in 2018.
You are assuming the son and the donor are married, which I don't believe has been stated. Also, it appears he needs the funds well before 2018. I stand by my advice; Write the check and file Form 709.
Gill

User avatar
JonnyDVM
Posts: 1592
Joined: Wed Feb 12, 2014 6:51 pm
Location: Atlanta, GA

Re: Gifting a down payment/avoiding gift tax

Post by JonnyDVM » Fri Apr 28, 2017 9:05 pm

Gill wrote:
JonnyDVM wrote:That's very generous of you. The answer has already been given but your best way is doing this over two years. 56k 2017, and the rest in 2018.
You are assuming the son and the donor are married, which I don't believe has been stated. Also, it appears he needs the funds well before 2018. I stand by my advice; Write the check and file Form 709.
Gill
Yes, yur right. I retract my prior statement. :)
Sometimes the questions are complicated and the answers are simple. -Dr. Seuss

shawcroft
Posts: 891
Joined: Sun Feb 24, 2008 4:18 pm
Location: Connecticut

Gifting a down payment-gift tax questions

Post by shawcroft » Fri Apr 28, 2017 9:45 pm

Dogsplaypoker:
No one has mentioned state gift tax considerations. I believe there are only two states which have gift taxes- Minnesota and Connecticut.
If you are not a resident of either of these, then your only consideration is Federal gift tax. (If anyone knows if there are more states than the two I mentioned, please let me- and our Boglehead colleagues- know)
Shawcroft

Danzangdc
Posts: 66
Joined: Sun Oct 13, 2013 7:59 am

Re: Gifting a down payment/avoiding gift tax

Post by Danzangdc » Sat Apr 29, 2017 12:21 am

Consolidating the advice above:

1. If you are not going to have an estate over $5._ million, then gift your son all you want and report the gift to the IRS. No taxes on the gift will ever be owed.

2. If you are going to have an estate over $5._ million, then:
(a) in Year 1, gift $14k times all the people involved (you, your spouse, your son, his spouse), and
(b) in Year 2, gift the rest.
Even if you can't gift all you want in Year 1, your son will be able to put down 20% and get a top rate without PMI.

WannabeAgAlum
Posts: 70
Joined: Mon Apr 03, 2017 10:55 pm

Re: Gifting a down payment/avoiding gift tax

Post by WannabeAgAlum » Sat Apr 29, 2017 12:56 am

Technically you're required to file a gift tax return, but if you don't and if you're estate is below your remaining exemption amount at death (which number takes​ into account the gift), no one at the IRS will give a flying flip that you didn't file.

Wannabe

User avatar
BL
Posts: 8174
Joined: Sun Mar 01, 2009 2:28 pm

Re: Gifting a down payment-gift tax questions

Post by BL » Sat Apr 29, 2017 1:18 am

shawcroft wrote:Dogsplaypoker:
No one has mentioned state gift tax considerations. I believe there are only two states which have gift taxes- Minnesota and Connecticut.
If you are not a resident of either of these, then your only consideration is Federal gift tax. (If anyone knows if there are more states than the two I mentioned, please let me- and our Boglehead colleagues- know)
Shawcroft
I had to check on the MN gift tax. There was one that was repealed a few years ago. So there is nothing to worry about there if you live in MN. The Estate Tax should be 1.8 million this year and winds up at 2 million next year and future years.

User avatar
Sandtrap
Posts: 5097
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

Re: Gifting a down payment/avoiding gift tax

Post by Sandtrap » Sat Apr 29, 2017 7:37 am

Dogsplaypoker wrote:Yes thank you, correctly stated I am not seeking to avoid the law or federal regulations. Simple asking for financial advice on how to best handle the tax claims/laws. All advice was very useful, thank you very much.
First, Congratulations on being in a position whereby you are able to help your son establish a firm financial base in life.

Second, Thank you very much for posting within forum guidelines and protocols, and encouraging actionable comments, experiences, and advice per personal experience. This is an outstanding question that comes up often, because it is encountered often on a personal basis. There's a lot of prior threads on this subject but more valuable information comes out every time it is asked which is great. Again, thanks for posting.

I wonder if the loan institutions do this to ensure that any monies involved outside of the OP's personal finances do not incure or potentially incur any liabilities or liens on the property.

Is this the primary reason they require this document of source of funds?
Other?

Experts?
:?:

User avatar
LadyGeek
Site Admin
Posts: 46745
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Gifting a down payment/avoiding gift tax

Post by LadyGeek » Sat Apr 29, 2017 7:45 am

Gill wrote:
LadyGeek wrote:This thread is now in the Personal Finance (Not Investing) forum (taxes).

I want to address several comments related to avoiding gift tax. For the record, discussions of dishonest behavior or bypassing the law are totally unacceptable.

The intent is to understand how to do this within the existing legal framework; in which case this discussion can continue.

Everything is a matter of degree. The choice of using a tax deferred account, e.g. IRA, to avoid taxes during some period of time is one extreme, managing assets to qualify for Medicaid is the other. Gifting assets to avoid taxes is somewhere in the middle. The bottom line is to work within the legal framework. Ethics is the ever present elephant in the room.

The approach is to educate members on how to do things legally. State your points in a factual manner. If the intent strays from this objective, please report the post and we'll investigate.
Sorry, but I'm a bit confused. Are you addressing comments in this thread or other discussions relating to taxes? I haven't seen any discussion of tax evasion. Discussions of tax avoidance are perfectly legitimate activities.
Gill
In this thread. Some readers interpret "avoid" to mean "evade" and the OP's intent was not clear at that time. If there are any further questions, feel free to PM me.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

chabil
Posts: 520
Joined: Tue Feb 14, 2012 9:38 pm
Location: North of Boston

Re: Gifting a down payment/avoiding gift tax

Post by chabil » Thu Aug 09, 2018 5:19 pm

Sandtrap wrote:
Sat Apr 29, 2017 7:37 am
Dogsplaypoker wrote:Yes thank you, correctly stated I am not seeking to avoid the law or federal regulations. Simple asking for financial advice on how to best handle the tax claims/laws. All advice was very useful, thank you very much.
First, Congratulations on being in a position whereby you are able to help your son establish a firm financial base in life.

Second, Thank you very much for posting within forum guidelines and protocols, and encouraging actionable comments, experiences, and advice per personal experience. This is an outstanding question that comes up often, because it is encountered often on a personal basis. There's a lot of prior threads on this subject but more valuable information comes out every time it is asked which is great. Again, thanks for posting.

I waonder if the loan institutions do this to ensure that any monies involved outside of the OP's personal finances do not incure or potentially incur any liabilities or liens on the property.

Is this the primary reason they require this document of source of funds?
Other?

Experts?
:?:
we are in the same process right now, gifting the amount of down payment which exceeds the annual gift amount as our son is not married yet. the loan company has sent us a form letter to sign and certify that the funds are gifts with no condition to repay and also the source is not from someone who has any interest in the sale of the property..

Thanks to the OP for this post as it answered all my questions as well.

Dottie57
Posts: 3932
Joined: Thu May 19, 2016 5:43 pm

Re: Gifting a down payment-gift tax questions

Post by Dottie57 » Thu Aug 09, 2018 9:34 pm

shawcroft wrote:
Fri Apr 28, 2017 9:45 pm
Dogsplaypoker:
No one has mentioned state gift tax considerations. I believe there are only two states which have gift taxes- Minnesota and Connecticut.
If you are not a resident of either of these, then your only consideration is Federal gift tax. (If anyone knows if there are more states than the two I mentioned, please let me- and our Boglehead colleagues- know)
Shawcroft
I don’t think there is a gift tax anymore in Minnesota.

The estate tax exclusion is 2.4m. Gifts back 3 yrs are included in the estate.

Nowizard
Posts: 1443
Joined: Tue Oct 23, 2007 5:33 pm

Re: Gifting a down payment/avoiding gift tax

Post by Nowizard » Fri Aug 10, 2018 11:31 am

Gift $14,000 from you and spouse to son and spouse now, equivalent amount in January, 2019, assuming all those people are in play.

Tim

User avatar
LadyGeek
Site Admin
Posts: 46745
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Gifting a down payment/avoiding gift tax

Post by LadyGeek » Fri Aug 10, 2018 3:13 pm

^^^ It's $15,000 for 2018. See: Frequently Asked Questions on Gift Taxes, from the IRS.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Post Reply