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My wife and I are purchasing a new home that we're closing on July 1st.

The sale of our house closes July 15th.

For the down payment on the new house we're a little short on cash and can't use the proceeds of the sale of our old house as the close date is after we close on the new house.

Our parents are going to lend us the cash for the down payment now and we're going to pay them back on July 15th.

We're going to be borrowing around $30,000 between two sets of parents.

Question is, what do we need to do as far as the IRS is concerned? I mean we'll get the money from them and pay it back less than two months later.

Thanks!

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What will the lender for the new house think about this money? They may see you as owning three loans and two houses, even if in the end you will end up with only one house and one mortgage. You may ask if it is better to get an official bridge loan instead of this temporary loan. –  mhoran_psprep May 12 at 11:47
    
As far as the lender is concerned, it's just a gift from the parents. –  Tom May 12 at 17:55
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If it is a gift then they will want documentation that it is a gift. –  mhoran_psprep May 12 at 18:12

1 Answer 1

up vote 5 down vote accepted

Question is, what do we need to do as far as the IRS is concerned? I mean we'll get the money from them and pay it back less than two months later.

You're probably worried about the gift tax. Since you're a couple, the maximum exclusion amount is calculated like this:

MAEA = MAEAp * Pr [ * Pg], where:
MAEA is the maximum exclusion amount per year in your situation;
MAEAp is the maximum annual exclusion per person receiving from any single gifter.
For 2014 MAEAp is $14000.
Pr is the amount of persons receiving the gift (2 in your case: you and your spouse).
Pg is the amount of persons giving the gift (2 in your case, your mother and father).

The reason the Pg multiplier stands separate is that gift splitting does require form 709 filed even if no tax is due, unless they actually write separate checks for their respective portions.

So the math shows that you and your wife can get at least $28K from anyone without the need of gift tax to be paid or gift tax return to be filed. You can get up to $56K from your parents, but the gift splitting may need to be documented on form 709.

Since you're in fact talking about a loan you're going to repay, you'll need to document it (with a note and everything), and document the repayment. If interest is being paid - your parents must declare it on their tax return for the year, obviously. In this case, if the loan is properly documented, repaid and the interest is declared, the IRS won't even bother claiming it was a gift. Even if there's no real interest, it shouldn't be an issue (the IRS might assign some "deemed" interest at their rates that would be considered a gift, but assuming no other gift transactions between you exist for the year the amount would be miniscule and way below the $14K exclusion level).


Of course, as with any tax concern, you get here what you paid for. For a proper advice talk to a tax adviser (EA/CPA) licensed in your State.

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