Just about every time a benefactor provides gift funds for a home purchase, two questions come up.
Do I have to report the gift to the Internal Revenue Service?
Do I have to pay tax on the gift?
The short answer for Question 1 is yes, in most cases you are supposed to report the gift. For Question 2, contributors likely don’t have to pay tax unless they are very, very wealthy.
Also see: How and how much homeowners can transfer tax base to their next home
First, let’s dig into the details of exactly what a gift is and who can provide it, as it concerns a lender offering a conventional mortgage.
A gift is money from a checking or savings account, stocks, government bonds, mutual funds, vested stock options and the like.
Virtual currency (cryptocurrency and the like) is acceptable so long as it is first converted into US dollars and put into a bank account. A gift of property equity is also acceptable.
A mortgage borrower may use funds received as a personal gift for some or all the down payment, closing costs and cash reserves for a primary residence or second home in most cases.
More on mortgages: How homeowners can choose between a fixed-rate second or HELOC
Gifts for rental properties are not allowed as far as Fannie Mae is concerned. Some lenders in the exotic loan category or so-called nonqualified mortgage lenders do allow gifts on investor properties. But the mortgages are priced higher compared to Fannie Mae.
A paper trail evidencing the gift from the benefactor is also required. For example, wire transfer evidence from the donor’s account to the borrowers’ account or the wire being sent directly to the escrow company.
Typical patrons include spouse, parent, godparent, relative, unmarried partner, former relative, relative of domestic partner and legal guardianship.
The annual gift tax exclusion is $19,000 for 2025. For example, a parent gifts $19,000 to a child. This means no tax and no gift tax return, according to Rod Stern, partner, Murtaugh, Treglia, Stern & Deily LLP.
Full disclosure: Rod Stern has done business for my family.
Both parents can give $19,000 to the child for a total of $38,000 without having to report the gift or pay taxes. If the child is married, each parent can give $19,000 to each “child,” meaning the spouse and the child can receive as much as $76,000, Stern said. “Any married couple (can do this) for any married couple. “This is not like property tax rules that are dependent on the parent-child relationship.”
Now to the bigger picture of penalties for anyone not filing a gift tax return, so long as the dollar amount of the gift is over $19,000.
“The penalty for failing to file is 5% of the tax due each month but capped at 25%, so there is no additional penalty after five months,” Stern said. “Failure to file the gift tax return is a minimum penalty of $435.”
Separately, each contributor is allowed to lifetime gift up to $13.99 million per person. This means that patron needs to file a gift tax return each year a gift is more than $19,000. So, both parents, for example, could give up to a total of $27.98 million lifetime gift and death, according to Stern.
“The tax implications are meaningless because most people don’t have a $14 million net worth,” Stern said.
The bottom line is, you’d have a minimum penalty of $435 for not filing, according to Stern.
Parents have asked me on occasion how they can protect their child and their own money if the child goes through a divorce after the gift and the property purchase. This presumes the parents don’t trust the child’s spouse or the longtime relationship. California is a community property state. There may be no protection, even if the child buys the property separately from their partner. Consult a divorce attorney or a trust attorney ahead of time.
As an aside, in the last three years, I count exactly two first-time buyer clients out of dozens who were able to buy without help (gift funds) from relatives. All those recipients of gift funds are the lucky ones. There is a plethora of first-time buyers who have the income but not the down payment.
Freddie Mac rate news
The 30-year fixed rate averaged 6.93%, 2 basis points higher than last week. The 15-year fixed rate averaged 6.14%, 1 basis point higher than last week.
The Mortgage Bankers Association reported a 3.7% mortgage application decrease compared with one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $145 less than this week’s payment of $5,328.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.875%, a 15-year conventional at 5.625%, a 30-year conventional at 6.5%, a 15-year conventional high balance at 5.99% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year-high balance conventional at 6.885% and a jumbo 30-year fixed at 6.875%.
Eye-catcher loan program of the week: A 30-year mortgage, with 30% down locked for the first 5 years at 5.875% with 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.