I often have people ask me if they can lend their son or daughter money instead of giving it as a down payment gift. Or some want to lend the money and then forgive the loan over time to avoid the gift tax. It seems many want to help their family but avoid taxes while they do it.
First, from an underwriting and mortgage guideline standpoint, this is not an option. Any bank lending mortgage money wouldn’t allow a homebuyer to borrow money on top of the mortgage they are already taking out. Any lender will make the gift giver sign a gift letter stating that the funds are strictly a gift, which will not be required to be paid back.
But the loan forgiveness idea is something you likely do not need to attempt as a workaround to avoid the gift tax. One can gift a child up to a certain amount each year and not have to worry about the gift tax. Check the IRS website for the latest gift limits and rules.
And if the down payment for the home is higher than the annual limits, a parent can possibly use part of their lifetime estate tax exclusion, which is millions of dollars. Here are the latest estate tax limits and rules on the IRS website. You’d have to file a gift-tax return to stay within the rules, and so the Feds know you were within the limits and did not cross the line into a gift amount where a tax was due.
And there you go, no need to try and pull a fast one on the underwriter or the IRS!
As always, please double check with an accountant to ensure that the above is correct and accurate, and applies to your scenario. Give me a call to talk about your specific situation and how to make it work out best for all involved.