Mortgage Gift Letter

[taubel]

We just signed a contract to buy a house and still own the house we currently live in. It will work out that we are buying the second house before we sell our current house, which is not even on the market yet.

In order to buy the other house without selling ours first, my parents have agreed to "lend" us between $40 and $50K. We will then pay them back once our current house sells.

Our lender is fine with all this. Today, he emailed me something called a "gift letter" for my parents to fill out prior to writing us a check for the amount we're borrowing from them. The letter states that the gift is to be applied toward the purchase of the property and no repayment is expected or implied. The lender stressed that people do this all the time and that the lender does not report any of this to the IRS.

I am just concerned that my parents could be taxed on this money, and that we could then be taxed when we pay them back. What's the difference between this and something like the gift tax (where you can only give a certain amount per year tax-free)? Also, since my parents are elderly, would this affect the Medicaid lookback period?

Has anyone else gone this route for their mortgage?

Thanks!

[Sharlla]

we got a large sum of money from FIL and we needed to do a gift too. i hadnt heard anything about taxes
 

[taubel]

Originally Posted by Sharlla 

we got a large sum of money from FIL and we needed to do a gift too. i hadnt heard anything about taxes
 

Did you then pay back the money - or was it truly a gift?

[Sharlla]

we send them money here and there but they never asked us for money back or anything.
 

[zebra15]

OP-  the phrase 'people do this all the time' makes my stomach cringe.  If your parents are anywhere near the point of medicare lookback age I strongly suggest double checking everything with an accountant and estate planning attorney. A few hundred dollars spent now for good sound advice that truly applies in your situation with your exact numbers is going to be money well spent. 

I honestly do not know the answer but it may be better to 'gift' you and your DH each 10k from both your mom and your dad or it may be better to set up an actual private loan document for this personal transaction.

[MariaMadly]

(Assuming U.S. dollars and tax code here.)

As far as federal taxes, I think gift tax kicks in at $11,000.  So if your parents were gifting you and your DH, in this example, and you wanted to avoid taxes, it would have to be a total of $44,000 or less, with $11,000 from your father to you and your DH and your mother to you and your DH.  This is the only kind of experience I've had with it, that the recipient would be taxed, not the giver.

I'm not sure about the rest of it -- why is the lender treating it as a gift rather than a loan?  In any case, I'd be confused having one transaction treated as a gift on paper and a loan informally, or having loan documents as well as this gift letter, or something.  The only thing I can think of is that your lender won't approve total loans over a certain amount on the part of the borrower?

You may be able to catch some free advice from a real estate or family attorney; even a consult fee might be worth it to clear up an issue about this much money.
 

[TiredX2]

Originally Posted by MariaMadly 

I'm not sure about the rest of it -- why is the lender treating it as a gift rather than a loan?  In any case, I'd be confused having one transaction treated as a gift on paper and a loan informally, or having loan documents as well as this gift letter, or something.  The only thing I can think of is that your lender won't approve total loans over a certain amount on the part of the borrower?

This is actually quite common.  The issue is that if it is a *loan* then the amount needs to be figured into the person's loan obligations and they may no longer be qualified for as large a mortgage.  Additionally, the bank wants to be guaranteed that they have first shot at your money (in a case of bankruptcy that the person who loaned you the money will not also be trying to get money out of the house) When we bought our house, we had some stock that was going to be expensive tax-wise for us to sell.  Instead, we took a short term loan from my in-laws and then repaid them when we sold the stock a few months later.  My FIL was a banker and was willing to sign the paper which *seemed* like lying, but he did say it was quite common AND that from the bank's perspective it was not a true loan (nothing was in writing and in a bankruptcy case they would not have filed against us).

[nd_deadhead]

My parents loaned us money for the downpayment on our house, and as Tiredx2 said, without that money, we would not have qualified for the loan.

When I gave my Dad the gift letter to sign for the bank, I gave him a letter of my own, promising to pay the money back (which I did). Once you've made your mortgage payment for the month, it's none of the bank's business what you do with the rest of your money - including repaying a gift.