What are the real consequences of giving a gift for a down-payment? You may be surprised!

You want to help your child or grandchild with the purchase of their new home but you are worried you will have to pay a ‘gift tax’.  What exactly is this tax and how does it work? Well, to start, the IRS defines a gift as “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.”  In other words, if you give someone something of value and don’t receive an equal value in return, you have given them a gift.

How are gifts taxed?

Gifts that you or your child receives are not considered income, and don’t get reported on your tax return. That being said, you can’t simply dodge taxes by calling your income a gift. So what’s all this talk about gift taxes? The gift tax actually applies to the donor, not the recipient. The whole point of this tax is to prevent individuals from transferring their estate to others before their death, thereby avoiding the estate tax.

Exclusions from the gift tax

There is an annual gift tax exclusion that currently stands at $14k/recipient. In other words, you’re allowed to give away up to $14k per recipient per year, to as many recipients as you wish, without any tax implications. This limit is effectively doubled for married couples, who can jointly give gifts up to $28k/year total to a single recipient. Also, if there are two parents gifting to a husband and wife, they can effectively give 56k per year with no tax implications.  More importantly, there is also a lifetime exemption before the gift tax is triggered. If you exceed the annual exclusion of $14k/recipient, you’ll have to file a gift tax return, but you won’t have to pay the gift tax until you reach the lifetime federal estate tax exemption of 5.25 million per person or 10.5 million per couple.

What happens once you exceed your lifetime limit? How much will you owe? At that point, the gift tax rate is, essentially, the estate tax rate and the amount owed will depend upon the estate tax rates in force at that time.

What you need to know

The concern about a ‘gift tax’ has prohibited thousands of families from assisting their children or grandchildren with the purchase of a home. However, the vast majority of these gifts could be given within the yearly limit and almost all within the lifetime limit. Don’t let confusion and misinformation stop you from helping your family members own a home of their own.