By most estimates FHA loan originations now make up somewhere between 33-50% of all mortgage fundings. One of the nice flexibilities about FHA loans is that it allows the borrower/ homebuyer to receive their down payment (minimum of 3.5%) entirely as a gift from a family member.
With the first-time homebuyer credit in effect we have seen a lot of this lately as parents encourage their children to buy so that they can buy their first home and receive an $8,000 tax credit.
However, most parents and children are not familiar with the tax treatment of cash gifts. Therefore I wanted to provide a quick outline of the most applicable points & a link to the IRS website where more information is available.
*An individual may gift up to $13,000 to another individual in 2009 and exclude all gift taxes. A couple may each gift up to $13,000 ($26,000 total) to an individual and exclude gift taxes.
*If a person gifts more than is allowable under the annual exclusion then they can avoid paying gift taxes in the immediate term by subtracting the amount of the excess gift from their $1,000,000 lifetime exclusion.
For example, let’s say John & Judy Williams gift $50,000 to their son James in 2009 so that he may buy his first home. Each parent is able to exclude up to $13,000 from gift tax liability for a total of $26,000. The remaining $24,000 is then deducted from their $1,000,000 lifetime exclusions ($12,000 each). Therefore, they’d be able to gift/ or pass through their estate up to $988,000 and still avoid gift/ estate taxes.