Gifting Money to Children to Purchase a Home

In today’s real estate market, many first-time home buyers struggle to raise enough cash for a down payment necessary to purchase a home. In this case, those home buyers may look to their parents for help. For parents who are in a financial position to help, gifting money to their children is a wonderful way to help them with what is often one of the biggest purchases of their life. We are asked by parents and children regularly if they can do this and what the tax implications of such a transaction are. The answer is yes you can do this, but you need to be aware of the tax rules that apply, particularly the gift tax rules.

The federal government imposes taxes on the gratuitous transfer of property from one person to another during a person’s lifetime. This tax is called the gift tax. The tax rate on these transfers range from 18% up to 40%. Unlike income tax, the gift tax is paid by the donor of the property, not the recipient. There are two important exceptions to this general rule that will apply in the case where you are transferring property to your children.

The first exception is the annual gift tax exclusion amount. This exclusion allows every individual to give up to a certain amount of property each year to any one donee without incurring any gift tax and without being required to file a gift tax return. The annual exclusion amount in 2024 is $18,000. A married couple can collectively give up to $36,000 per year to any one donee without any gift tax consequences.

The second exception is the lifetime gift and estate tax exemption amount. In addition to being able to use the annual gift tax exclusion above, every individual may transfer a total of $13,610,000 worth of property during their lifetime and at death without paying any gift or estate tax on such transfers. This exemption applies to any transfer that exceeds the annual gift tax exclusion amount. Any gift in excess of the annual exclusion amount must be reported on a gift tax return of the donor for the year in which the transfer was made – even if no tax is due.

With an understanding of these rules, let us look at an example where parents desire to give a gift of $50,000 to their child to assist the child with a down payment on a home. If the parents are married, $36,000 of the $50,000 gift will qualify as an annual exclusion gift – $18,000 from each parent on which no gift tax is imposed or gift tax return required. The remaining $14,000 would require the parents to file a gift tax return reporting the transfer and the $14,000 would reduce the parents’ $13,610,000 lifetime gift and estate exclusion amount. No gift tax would be due from either the parents or the child. Importantly, no income tax would be incurred by either the parents or the child.

Conclusion

Parents transferring money to children to assist them with the purchase of a home is a great way to help your children in what is typically one of the biggest purchases of their lives. When considering such a transaction, make sure you are familiar with the tax consequences associated with the transfer.

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