Last month, we discussed the pros and cons of lending money to a family member for the purposes of assisting them with the down payment to obtain a home loan. This month we will focus on the consequences of simply transferring the money to them as a gift.
If instead of loaning a child a certain amount to be used as a down payment on a home, the funds are simply gifted to them, there are still some tax issues that must be considered.
As we noted last month, in 2018, gifts under $15,000 per year per person per donor are tax “exempt” under federal gift tax laws. This is called the Annual Gift Exclusion. Married couples can effectively double that amount to $30,000, if each spouse makes a gift. The exempt gifts can increase to a total of $60,000 spouse ($15,000 x 4) if each spouse makes a gift to say a child and their spouse.
Gifts over $15,000 per year per person per donor are called “taxable gifts”, but, in most cases, there is only a duty to report the gift to the IRS on Form 709 but no actual gift tax is due. What is reported on that form are gifts made in excess of $15,000. For example, if a gift of $40,000 is made, only $25,000 ($40,000 – $15,000) needs to be reported to the IRS.
The reason there is typically no tax payable is that, in addition to the above-noted Annual Gift Exclusion, there is also a Lifetime Gift Exclusion which, in 2018, is approximately $11.2 Million. Using the above example, if a taxpayer makes a $25,000 reportable gift, it simply reduces the available Lifetime Gift Exclusion by that much. For example, $11,200,000 less $25,000 equals $11,175,000. Accordingly, there is still a very large exemption still available to make future gifts during life or after death.
Due to the very high limit under the Lifetime Gift Exclusion, the vast majority of taxpayers will not face a tax liability for gifts to their children.
What is a common concern, however, is the parents’ sense of fairness to their children. Say, for example, that a married couple has two children and son borrows $100,000 for a down payment but daughter does not. How can this unequal treatment of the children be addressed if the funds are intended as a gift to son.
In most cases, the couple can simply amend their estate plan. If the existing trust or will seeks to divide the estate in equal shares among the children, these documents can be amended to provide that daughter receives the first $100,000 of the estate distributions and the balance is then split equally.
As this two part article shows, there are options for parents attempting to assist their children with coming up with a down payment, but which option to pick can be complicated. If you find yourself in the position where you are considering loaning money to anyone, speak with your attorney BEFORE the deal is struck.
Timothy P. Murphy
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