What’s a gift letter?
A gift letter is a legal document that states that money from a friend or family member is a gift. For tax purposes, gift letters are helpful for borrowers who receive assistance with a down payment on a new house or real estate property. Letters say the money received is not expected to be repaid in any way.
How Gift Letters Work
Gift letters are crucial since lenders usually frown on borrowers utilizing borrowed money for a down payment on a house or other property. “Gifted” money is different. A gift letter emphasizes that money is a gift, not a loan. The gift-giver must compose the letter for it to be valid. The letter also commonly reveals the gift-giver-recipient connection.
Gifts can be any sale, trade, or other property transfer from the donor to the receiver. Gifts often include:
- Cash, check, or other goods
- Transferring shares or real estate without payment
- Forgiving debt
- Loans below market
Donations over an annual sum are subject to income taxes if not to a spouse or qualifying charity.
The donor (who does not anticipate repayment) must sign legally obligatory gift letters.
Gift Letters and Other Methods
Several giving techniques rely on letters. For instance, inter vivos giving reduces taxable estate as the individual no longer owns the property at death but remains liable to taxes if done three years before death. In 2023, the estate and gift tax exemption per person will be $12,920,000, up from $12,060,000 in 2022.
Real estate, which will appreciate significantly in the future, is often gifted. This removes its current value and potential appreciation from the donor’s estate. Gifting assets that have appreciated considerably is less favorable since the recipient will have the same tax (carryover basis) as the giver.
I am inheriting an asset instead of receiving it as a gift, which enhances its tax basis to the fair market value at the time of death.
Mortgages and Gift Letters
Gift letters typically include real estate deals. Suppose a parent gives their child $100,000 for a home down payment. The lender may seek proof that this money is non-repayable. A home loan lender may need both the giver and beneficiary to sign a statement stating that the monies are gifts.
A lender may require a gift letter if a borrower’s account has unusual or substantial deposits.
Contents of Gift Letter
There is no standard gift letter template. Gift-letter parties usually require the following:
- Donor name.
- The recipient’s name.
- The donor’s address, phone number, and relationship to you
- Gift amount in dollars. This may be an estimated value for non-cash transactions that require accompanying documentation.
- Gift date.
- A declaration declaring the money a gift with no extra compensation
Gift Letters—IRS Reportable?
The IRS typically requires written proof of charity contributions. These communications frequently concern donations or freebies without return.
Why do lenders need gift letters?
A mortgage lender can assess a borrower’s financial risk. Huge loans differ significantly from tremendous gifts. A lender will request a gift letter to determine the borrower’s additional financial commitments and extenuating financial situation.
Are gift letters enforceable?
Gift letters are binding. Multiple parties utilize and rely on the gift letter, and the giver and recipient must abide by its stipulations.
Bottom Line
A gift letter is a signed document that states a lump-sum donation is non-repayable. When giving mortgages or house loans, lenders may request this letter since people may receive vast quantities of money before buying real estate.
Conclusion
- A gift letter is a legal document that states that money from a friend or family member is a gift.
- Gift letters are vital for real estate down payments since lenders frown on borrowers utilizing borrowed money for a down payment. Gifts are fine.
- Financial institutions may request gift letters before lending.
- Individual estate and gift tax exemptions will total $12,060,000 in 2022. In 2023, the estate and gift tax exemption will be $12,920,000.
- A donor’s signature, information about the giver, and a promise not to repay the money are typical in gift letters.
