Can a family member lend you money for a down payment?
Then, there are intra-family loans for down payment assistance. In an intra-family loan, someone with means helps a family member finance their mortgage and then charges them interest. These loans also must be repaid on a schedule.
Asking a friend or family member for a down payment loan is another option. Lenders will only accept a private mortgage secured by an asset, which means you'll need to put up your home, car or another valuable — like artwork — as collateral for the loan.
You can use gift money for your entire down payment or just a part of it, but the exact breakdown of funds will depend on your loan and property type. If your down payment will be made with a gift, you should expect the lender to request the following documentation: A gift letter signed by you and the giver.
Tax implications: If the family loan is interest-free and over a certain amount ($17,000 in 2023 or $18,000 in 2024), the lender may need to file a gift tax return. If the loan includes interest, the lender must follow IRS interest rate guidelines and potentially report it as income.
On the borrower's side, there are typically no tax implications. The borrower doesn't typically need to report the loan and won't pay any income tax on it. In some cases, the borrower may get a tax perk from borrowing money from family. This is only the case if the borrowed money is used to purchase a home.
- Your name and the borrower's name.
- The date the loan was granted.
- The amount of money being lent.
- Minimum monthly payment.
- Payment due date.
- Interest rate, if you're charging interest.
- Consequences for defaulting on the loan.
The $100,000 Loophole.
To qualify for this loophole, all outstanding loans between you and the borrower must aggregate to $100,000 or less. Under this loophole, if the borrower's net investment income for the year is no more than $1,000, your taxable imputed interest income is zero.
Family: family members can provide gifts regardless of loan type – up to 100% of your down payment. Friends: although friends are typically restricted from helping out with conventional mortgage down payments, they can assist with FHA loans, USDA loans, and VA loans (as long as certain conditions are met).
Can my parents give me $100,000? Your parents can each give you up to $17,000 each in 2023 and it isn't taxed. However, any amount that exceeds that will need to be reported to the IRS by your parents and will count against their lifetime limit of $12.9 million.
If you have family or friends who are in a financial position to help you with a down payment, then they can give you money for that purpose. However, to apply the money to a down payment, it must be a gift and not a loan. You'll need to present a signed statement that confirms the funds are not to be repaid.
Do I have to declare a family loan?
You don't have to worry about family loans being subject to tax consequences if: You lend a child $10,000 or less, and the child does not use the money for investments, such as stocks or bonds. You lend a child $100,000 or less, and the child's net investment income is not more than $1,000 for the year.
Tax implications of loans to family members
While family members can charge interest rates below current market rates, the applicable federal rate is the minimum interest the lender can charge for loans more than $10,000. If you charge less than this rate, you'll have to pay taxes on the unearned interest.
First, the donor, or giving party, must perform some act constituting the actual or symbolic delivery of the subject matter of the gift. Second, the donor must possess an unequivocal intent to give. Third, the donee, or receiving party, must accept the gift.
The IRS mandates that any loan between family members be made with a signed written agreement, a fixed repayment schedule, and a minimum interest rate. (The IRS publishes Applicable Federal Rates (AFRs) monthly.)
The IRS allows every taxpayer is gift up to $18,000 to an individual recipient in one year. There is no limit to the number of recipients you can give a gift to. There is also a lifetime exemption of $13.61 million.
Any interest you receive will be treated as income for tax purposes. For instance, if you loan a family member $45,000 for a year, and the applicable federal rate for that kind of loan is 4% and that's how much you charge, you'll receive approximately $1,800 in interest to report as income and pay any taxes due.
- Tell your friend or relative you'll think about lending them money. ...
- Look at your finances before making a loan. ...
- Get everything in writing. ...
- Think about the risks. ...
- Consider setting the debt repayment plan on autopay.
The two sides must sign a promissory note that spells out the interest rate, terms and conditions, length of repayment period, and ability to transfer the loan to another party.
Lack of documentation.
Many times, when we loan money to friends or family, we don't bother to document it in writing. This makes it very easy for miscommunication to arise regarding the terms agreed to verbally. You can minimize this though by easily documenting the personal loan.
You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.
Does a loan count as income?
Personal loans aren't considered income, so you usually don't pay taxes on them. While a personal loan provides you with a lump sum of money that you can spend like income, you must repay it, which makes it a liability rather than taxable income.
Capacity is also determined by analyzing the number and amount of debt obligations the borrower currently has outstanding, compared to the amount of income or revenue expected each month. Most lenders have specific formulas they use to determine whether a borrower's capacity is acceptable.
Gifting a Down Payment
There are no special gift tax rules around a down payment but the mortgage system can make this process a little more complicated. Banks use down payments to assess whether a borrower can afford to pay the loan, so they add extra steps when the money comes from a third party.
Since a gift of that size is more than the current annual exclusion of $18,000, you would have to file Form 709 to report the gift to the IRS. However, unless your total lifetime gifts are more than the lifetime exclusion amount, currently set at $13.61 million, you won't have to pay any taxes on these gifts.
Share: Generally, the answer to “do I have to pay taxes on a gift?” is this: the person receiving a gift typically does not have to pay gift tax. The giver, however, will generally file a gift tax return when the gift exceeds the annual gift tax exclusion amount, which is $17,000 per recipient for 2023.
