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A family member intends on gifting us a sum of $70,000 towards the purchase of a new home. My question is - will that family member owe any gift tax on it? I have been reading sources that appear conflicting. Basically, the $70,000 is way under the $5.25 Million lifetime exception, but is over the $14,000 annual gift exclusion. Finally, are there any tax consequences for me, as the recipient?

Thanks for looking.

  • Since this question overlaps with your other question, you could narrow the other question to focus on the issues that aren't covered in this one. – John Bensin Sep 19 '13 at 15:22
  • The two questions are tightly coupled. I don't see why they are separate. – JTP - Apologise to Monica Sep 19 '13 at 19:33
  • I suspected my earlier question to be very specific (considering the loan situation), and that's why I broke it out here to get information solely about the gift tax aspect. – rs79 Sep 19 '13 at 19:52
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No tax consequences to you.

Tax consequences to your sister. From your comment:

My sister is single, but my wife and I have a son. So we can avail $14000 x3 = $42000 without the need to report it. The remainder ($70000-$42000) = $28000 will be reported against the lifetime exclusion by my sister on her return. Per my understanding, the $28000 is also not subject to any gift tax

It is subject to gift tax, and she must submit gift tax return (form 709) to the IRS. On that return she can choose to apply part of the lifetime exemption and reduce the lifetime limit, or pay the tax and keep the lifetime limit. If she applies the exemption, she needs to keep track of it, so that it could be properly applied next time, or when she passes away.

The lifetime exemption is in fact intended for the estate tax. But people can chose and apply it to gifts during lifetime and reduce the exemption for estate. This is something of consequence to take into account.

Yearly $14K cap is not related to the lifetime exemption and is for gifts per donor per donee. Breaking the gift into several occasions over several years helps reducing the tax burden on the donor without touching the lifetime exclusion and affecting the estate tax. But if you don't have the time...

  • Was my understanding incorrect about the cumulative cap? They are really completely separate? – MrChrister Sep 19 '13 at 17:48
  • @MrChrister these are two different and unrelated caps. – littleadv Sep 19 '13 at 17:50
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    @littleadv - You know your stuff, but the wording might confuse - "Yearly $14K cap is not related to the lifetime exemption" - If I gift over $14K, I'd use part of my lifetime exemption. So they are not 100% distinct, gifting over the annual limit potentially taps the lifetime. – JTP - Apologise to Monica Sep 19 '13 at 19:20
  • @joe semantics, but gifting over 14K exposes you to the tax, which you can mitigate with the lifetime exemptions, whereas gifting below 14K doesn't expose you to the tax at all. – littleadv Sep 19 '13 at 19:24
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    One other point: If the (minor) son is gifted $14K, then the OP and wife cannot use that money towards a downpayment for the house of which hubby and wife own jointly. As @JoeTaxpayer said in a response to a different question, "that would be stealing"; that money belongs in a UTMA or UGMA with the son as beneficiary. If the son is not a minor, then he would need to first make a gift of $14K to his parents (no gift tax consequences). But the IRS may charge the sister for gift tax because the pair of transactions do not pass the smell test. – Dilip Sarwate Sep 19 '13 at 19:44
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To answer the last question first: there are no tax consequences to you.

If your family member is married (or has a joint owner of the funds), and so are you, each of them can give each of you the $14K annual gift, which would be $56K. The remainder of the $70K would be subject to either (1) Gift Tax for the tax year in which it was given, or (2) applied to the lifetime exclusion. Either way would require filing a form with the IRS.

  • So if it is applied to the lifetime exclusion, then there is no tax consequence to the donor, right? – rs79 Sep 19 '13 at 16:40
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    @rs79 - Only to the estate of the donor. The donor would not be paying taxes during their lifetime. And since the exclusion is quite large, very few estates are subject to estate tax anyway. – Rick Goldstein Sep 19 '13 at 17:13
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When you apply for the mortgage expect that the lender will want your sister to sign a form explaining that that is a gift, otherwise the lender might be concerned that it is a loan.

Be careful about the gifting of the money to a minor. You could run into an issue if the money isn't spent on something that benefits the child. The IRS does get concerned about using money transfers between child and parent to get around tax issues.

Other than that you don't have a tax issue. If the gifting is done correctly your sister can gift $14,000 to you and your spouse each year.

If your child has a large expenses in the near future: tuition, braces... Your sister could transfer funds to the child to pay for those items, thus freeing up some of your funds for the house.

  • Thanks for the tip about lending to the child. We could always claim those funds to be used for child care :). After all, he's the reason why we have to move in a bigger home..lol. Jokes apart, I'll be mindful of the situation – rs79 Sep 19 '13 at 18:23

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