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Gifting a Home Down Payment to Your Child? What to Know

A woman and her daughter caring moving boxes through a door.

Many first-time buyers struggle to come up with a 15% to 20% down payment for a house, especially if they’re still paying off student loans.

As adult children look towards homeownership, some parents decide to gift money for the down payment to make this goal possible. In fact, 16% of all buyers received a gift or loan towards their down payment from a friend or relative in 2019.1

Some with the ability to comfortably make a down payment gift without hurting their retirement, decide to help their kids become homeowners. They may view it as a way to make an impact while still being able to see the results. If you determine this is right for your situation, here are some considerations about gifting money to your child to buy a house.

Gift Tax Rules

So how much can parents gift for a down payment? For 2020, the IRS gift tax exclusion is $15,000 per recipient. That means that you and your spouse can each gift up to $15,000 to anyone, including adult children, with no gift tax implications. If your child purchases a home with a spouse or fiancé, you and your spouse could each gift up to $15,000 to the buyers for a total of $60,000.

If your gift exceeds this amount, you may want to consult an accountant on potential tax consequences. In addition to the $15,000 annual exclusion, there is a $11.58 million lifetime exclusion in 2020, up from $11.4 million in 2019.2 For married couples, it’s double that amount.

Lifetime Maximum

Amounts above the $15,000 annual gift tax exclusion count towards the lifetime exclusion. So if you were to give $100,000, $85,000 would go towards the lifetime amount. The gift giver needs to file a gift tax return, but may not have to pay a gift tax depending on the lifetime maximum. The recipient usually doesn’t need to report the gift.*

Lender Documentation Requirements

You or your adult children may want to check with the mortgage lender about requirements to document a down payment gift. Mortgage lenders have these rules to protect themselves against fraud or default.

Gifts are generally permitted for the full amount of the down payment on a primary residence. Specifics may vary depending on whether the borrower is applying for a conventional loan, a Federal Housing Administration (FHA) loan, or a Veterans Affairs (VA) loan. 

There may be some extra steps if funds have been in the borrowers’ bank account for fewer than 60 days. The gift-giver may need to provide bank statements from where the funds originated. They may also need a letter that states the money is a gift and does not need to be repaid. Gift letters should explain who the donor is, how much they’re giving, and the date of the fund transfer. You may want to keep a paper trail to document this, too.

A Potential Requirement

Some lenders may also require that the gift-giver be a relative rather than a friend or coworker. Sellers and homebuilders cannot gift money for a down payment.

Alternatives to Gifting a Down Payment

Gifting a down payment to a married couple can get messy if the couple later divorces and the home is considered a joint asset. Remember that a gift is irrevocable. If this is a potential concern, consider consulting a family law attorney in the state where the couple lives.

By understanding the ins and outs of down payment gifts, you may better know what to expect during the process.

If you’re considering a gift to help your child buy a home, you may want to consult with a financial planner and accountant to get the details specific to your situation. 

Thinking About Your Finances

If you’d like to get a clearer picture of your financial plan, we’re here to help.

Source: Nerdwallet, 2020 Gift Tax Rates: I’m Generous, but Do I Have to Pay This?, July 2020.

National Association of REALTORS Research Group, Downpayment Expectations & Hurdles to Homeownership, April 2020.

IRS, What’s New – Estate & Gift Tax.

IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.