Understanding Gift Letters in Real Estate Transactions: What You Need to Know

As real estate prices continue to rise, family members’ financial assistance is becoming more common for first-time homebuyers.  Banks, however, are very particular about where funds for home purchases are coming from, especially when the funding isn’t directly the result of buyers’ income or savings.

In come gift letters.

The use of gift letters in real estate transactions is a common practice that helps borrowers prove that money received from friends or family is a gift and not a loan. These letters are especially important when it comes to making a down payment on a new home or other real estate property.

Gift letters typically contain specific information such as the donor’s name, the amount of the gift, confirmation that it is not to be repaid, and the donor’s signature. Mortgage lenders often require gift letters to ensure that borrowers are not using borrowed funds for their down payment.

In addition to real estate transactions, gift letters can also be used for estate planning purposes or in the case of a gift of equity where property is sold below market value. It is essential to follow a standard format when writing a gift letter and provide any additional documentation requested by the mortgage lender to verify the source of the gift.

When it comes to taxes, not all gifts are taxable, and the donor is usually responsible for paying any gift tax if applicable. The IRS sets annual exclusions on gifts, with any amount above the limit subject to taxation. It’s crucial for both donors and recipients to be aware of the tax implications of gifts and to follow the necessary guidelines to avoid any issues.

Overall, gift letters play a significant role in real estate transactions and other financial transactions involving gifts. By following the proper procedures and providing the required documentation, borrowers can successfully use gift funds towards their down payment and navigate the process with ease.