Peter Boutell: Lending A Hand

businessman and tax. vector flat illustrationThere are six people who are outstanding writers, they are students of Duane Gomer Education past and future, and I consider them all good friends.

Number 5 in our series is Peter Boutell of Santa Cruz.  He has been a weekly Columnist for the Santa Cruz Sentinel for many years.  He has an extremely successful Mortgage Company and it is a pleasure having him and his staff to my Santa Cruz MLO sessions every fall.

Lending A Hand

The question of how much can parents donate to their kids without having tax consequences comes up over and over again for us in the business of originating mortgages for homebuyers.

The act of parents giving their kids money to help them buy a home continues to be misunderstood and consequently is restricting the funds that parents are making available for their kids.

Many first time homebuyers receive help from their families and many parents want to help their kids buy a home but they believe, unfortunately, that they have to spread that gift out over multiple tax years. It is a common myth that parents can only give their kids $14,000 per year in order to avoid a federal gift tax.

This Myth Has Greatly Influenced The Giving Of Cash For Real Estate Transactions

In many cases it has severely limited what willing and able parents were giving their children in order to help them buy a home. After all, $14,000 may barely be enough to cover closing costs.

The IRS is looking over our shoulders to make sure that we all meet the requirements of the tax code but it does not require a donor (or the one receiving the gift) to pay a gift tax if they give a gift of over $14,000 in a tax year.

The IRS does require a gift tax return to be filed if more than $14,000 is given by any one parent to any one child in 2017 but no tax is due. In 2017 no gift tax is due upon death unless the gifts given in a lifetime exceed $5.49 million per person (this number typically is amended each year and was $5.45 million in 2016 and was just $1.0 million in 2003).

The one receiving the gift has no tax consequences. Be sure to consult your accountant for details.

The Mortgage Industry Has Its Own Set Of Rules Regarding Gifts

In general, a borrower may receive a gift from a close relative to help him or her cover the down payment and closing costs. The maximum gift amount varies depending on the size of the down payment and whether the loan is underwritten to Freddie Mac, Fannie Mae, jumbo or FHA guidelines.

Generally, both Fannie Mae and FHA allow the down payment and closing costs to all come from gift funds regardless of the size of the down payment.

No gifts are allowed for purchase of rental properties and gifts are allowed for purchase of second homes as long as the homebuyer has at least 5 percent of the sales price of their own funds into the transaction.

Gifts Must Be Carefully Documented

We will need a letter from the donor stating the gift does not have to be repaid.

We will also need a paper trail of that gift giving to prove: 1) that the donor had the money to donate (a bank statement suffices) and 2) that the borrower received the money from that relative’s specific account.

Generally, wiring funds directly to escrow is the best method because a wire provides the documentation that proves the source of the money.

It is simplest to wire funds directly into the borrower’s escrow account but if funds are wired into the borrower’s personal bank account, the borrower will need a printout from their bank of their account that covers the period of time from the last bank statement through the date of the deposited gift funds.

This column has been written every Saturday since 1995 by Peter Boutell, Mortgage Banker and a principal at Santa Cruz Home Finance.

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