Affluent Savvy
Affluent Savvy
Photo: Mathias Reding
A gift letter is a formal document proving that money you have received is a gift, not a loan, and that the donor has no expectations for you to pay the money back. A gift can be broadly defined to include a sale, exchange, or other transfer of property from one person (the donor) to another (the recipient).
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Learn More »A gift letter is a piece of legal, written correspondence explicitly stating that money received from a friend or relative is a gift. The most common use of gift letters is when a borrower has received assistance in making a down payment on a new home or other real estate property. Such letters state that the money received is not expected to be paid back in any way, shape, or form. If you have received a gift from friends or family to buy property, your mortgage provider may require you to sign a gift letter. In this guide, we’ll look at what a gift letter is, how and why you can use one, and what the tax implications of gifts are. Key Takeaways A gift letter is a piece of legal, written correspondence explicitly stating that money received from a friend or relative is a gift. Gift letters are important when it comes to paying a real estate down payment, for example, because lenders tend to frown upon borrowers using additional borrowed money for a down payment on a home or other property. A lender may require a receipt of a gift letter if there are abnormally large deposits into your bank account leading up to the purchase of real estate or an indication of third-party funds helping fund the purchase. A gift letter must contain the donor's name, the gift's value, confirmation that the gift is not to be repaid, and the donor's signature. For tax year 2022, the Internal Revenue Service (IRS) says that the annual exclusion on a gift per person per year is $16,000. In 2023, this amount is increasing to $17,000. This means that the donor will have to pay taxes and file a gift tax return on any amount above that.
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Learn More »For example, suppose you just got married and your grandparents gave you $5,000 as a wedding gift. You can use this money toward a down payment and closing costs on a home, but to do so, you’ll have to reassure your mortgage provider that it wasn’t a loan. To do that, you have your grandparents draw up a gift letter that you can then give to a mortgage lender. The gift letter will indicate their relationship to you, the exact amount and source of the funds, and state that you’re under no obligation to pay it back. If you plan on using wedding gift money to put a down payment on a home, make sure it comes from an eligible donor. Gift letter requirements and acceptable donors vary by mortgage loan type.
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Learn More »If a gift is taxable, the donor is usually the one who pays the gift tax unless the gift recipient makes an arrangement to pay it. As of 2022, the Internal Revenue Service (IRS) determined that the annual exclusion on a gift per person per year is $16,000. In 2023, this gift tax exemption is increasing to $17,000. This means that the donor will have to pay taxes and file a gift tax return on any amount above that. For example, if someone gives you $25,000, they will have to pay taxes on the amount over the annual exclusion. For 2023, this would be $8,000. Lastly, be aware that even if gift amounts fall within the IRS gift exclusions and exemptions, donors will still need to file a tax return so that their donations can be counted toward their lifetime tax exemption. Which Gifts Are Not Taxable? You don’t pay taxes on some types of gifts. These include gifts that are not more than the annual exclusion for the calendar year, tuition or medical expenses, gifts to your spouse, or gifts to a political organization. Is a Gift Letter Legally Binding? Yes. Because the paperwork for your loan is entered into the record, a gift letter is then a legally binding document. Does a Gift Letter Need to be Signed? Because a gift letter is legally binding, lenders will require the letter to be signed by the donor. It is less important for the recipient to sign the letter, as the letter is primarily focused on confirming the donor expects to not receive their money back. How Do I Write a Gift Letter? Most mortgage providers will have a template that you can follow, but in general, your gift letter should include: The donor’s name, address and phone number
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