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Columns: Dr. Don
Don Taylor, Ph.D., CFA, CFP   Expert: Don Taylor, Ph.D., CFA, CFP
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Parents' mortgage gift may trigger tax

Dear Dr. Don,
My parents want to give me money to help me buy a house. They each would like to give me around $30,000. Does that amount fall in the gift tax? If so, how can I avoid having my parents or myself pay the gift tax and still get the full amount for a down payment?
-- Lee Lump-Sum

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Dear Lee,
There is an annual gift tax exclusion. Gifts up to the annual exclusion limit are not subject to the gift tax. If the gift tax falls under the annual exclusion, the donor of the gift should not have to file a gift tax return. Here's what IRS Publication 950, "Introduction to Estate and Gift Taxes," says about a gift tax return:

Gift tax returns are filed annually.
However, you generally do not need to file a gift tax return unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year, or a gift not subject to the annual exclusion.

The annual exclusion for the 2009 tax year is $13,000. Married couples can split gifts. But if they do, they will have to file Form 709 -- United States Gift (and Generation-Skipping Transfer) Tax Return -- even if half of the split gift is under the annual exclusion amount. Again, from Publication 950:

Gift Splitting
If you or your spouse makes a gift to a third party, the gift can be considered as made one-half by you and one-half by your spouse. This is known as gift splitting. Both of you must consent (agree) to split the gift. If you do, you each can take the annual exclusion for your part of the gift.

In 2008, gift splitting allows married couples to give up to $24,000 to a person without making a taxable gift. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709 even if half of the split gift is less than the annual exclusion.

Gift splitting in 2009 would allow up to a $26,000 combined gift under the annual exclusion.

A combined gift of $60,000 in a single tax year would exceed the annual exclusion limit. In general, the donors are responsible for any gift tax due. However, there is a unified credit for lifetime gifts made over and above the annual exclusion limits.

Your parents need to discuss their planned gifts with their accounting professional and possibly their estate planning attorney. The tax code as it applies to estate taxes is in a state of flux, and changes made to the code could impact their decisions about gifting. This column is not a substitute for professional accounting or legal advice.

On the mortgage front, it's pretty common for parents to gift monies to their children to come up with a down payment. The mortgage lender will typically request documentation, known as a gift letter, for assurance that the money is a gift and not a loan. That's because the debt service requirements on the loan of a down payment increase the risk to the mortgage lender.

Bankrate.com's corrections policy -- Posted: July 13, 2009
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