Tax Implications of Using Gift Money for a Honolulu Down Payment

There are times where a Honolulu home buyer needs a little more money to put a down payment on a house.  It is a stressful time trying to find even a minimal down payment or to find enough money to secure that better interest rate.  

This is when many people consider using a gift from a family member who is willing to part with the money needed.  While this is an option that many Honolulu buyers use, both the buyer and the person giving the gift need to understand what this will do to their tax return.

Who Gives the Gift?

To help Honolulu buyers avoid taking money from someone who may want it back later there are stipulations to who can provide the money.  The money needs to come from an immediate family member. This can include parents, grandparents, a sibling, or even a spouse. There are occasions where a significant other may provide the gift if the couple intends to become married.

With the gift, there will need to be a gift letter included.  This letter shows who is providing the money, how they are related to the buyer when the gift is provided and the total amount given.  In addition, to this letter, the one who is providing the gift must give a statement that they do not want the money to be repaid.

Something to consider is the amount of money being put down.  A down payment that is more than twenty percent of the value of the home can come completely from a gift.  However, a Honolulu home buyer who is putting less than twenty percent down must provide some of their own money in addition to the gift.  

Gifting Tax-Free

The maximum amount allowed while remaining tax-free is fifteen thousand dollars.  Any sum over that amount given from one family member to the buyer will need to be taxed.  

A Honolulu buyer can utilize this to their advantage and ask multiple family members to help them with their down payment.  If a couple asks their parents to help they can receive fifteen thousand from each of their parents totaling to sixty thousand dollars for a down payment that is still tax-free.

Gifting Above $15,000

Any gifts by a single person to a buyer that is over the maximum amount need to be claimed on their taxes.  Only the person providing the money will need to claim this gift. However, that does not mean they are going to pay taxes on the gifted money.

Gifted money is tracked for a lifetime.  The lifetime amount must exceed $11.4 million before the gift rate starts.  After years of gifted and claiming these gifts on taxes, some people may reach this amount.  If they do they may see rates of eighteen to forty percent.

Failure to Report

It is important for anyone providing high gift amounts to report that as soon as possible.  But there is a three-year statute of limitations that gives the donor some leeway. After this point, the IRS can assess the gift and decide on the gift tax with penalties or interest.

Gifting or receiving a gift for a down payment can be a good way for a Honolulu buyer to get into their next dream home.  They get the money they need and in many cases, neither party needs to claim the gift on their taxes. For those gifts that do exceed the maximum the one providing the gift needs to claim it on their taxes within three years to avoid penalties.