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My second cousin is asking for 14k as a gift for down-payment for his mortgage loan with the idea that he will pay me back when he can, but without us setting any formal/legal obligation to do so (so that it isn't a "loan").

Do I need to worry about any personal liability by calling it a gift since we have intent of repayment even though there's no legal requirement of repayment?

Edit:

Thanks everyone for all the responses! I'm taking everyone's advice to offer the money as a loan and not declare it as a gift. I find it funny and suspicious that his mortgage broker said it was fine when I asked about the gift thing, but glad I got more opinions before following the broker's instructions

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    That’s what you’re worried about? You’ll never see the money again. – JTP - Apologise to Monica May 16 '18 at 18:36
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    Please see this question and other related ones, this is a reasonably common question in its general nature (if not the specifics). – Joe May 16 '18 at 19:11
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    Intent of repayment = not a gift. – Grade 'Eh' Bacon May 16 '18 at 20:25
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    @JoeTaxpayer Why is that so? Some families keep the promises they make. I politely disagree. – Alexus May 16 '18 at 22:17
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    @Alexus: If this is a promise, and this is the kind of family that keeps its promises (and thus expects the promise to be kept), then we clearly have a loan here. – cHao May 16 '18 at 22:21
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It sounds to me like you're loaning your cousin money.

Now, you ask about personal liability. What sort of liability are you asking about? Tax liability? You can gift him the interest, no problem, without any issues; so you loan him $14k today, and then gift him 5% interest forgiven each year, and he eventually pays you back, all square. (And if he never pays you back then some year you'll officially gift him the $14k, and write off the loan in your head.) The interest amount is well under the annual exemption for gift tax.

As far as I know, having a gift or a loan doesn't create any additional liability on your part (like, liability to pay his mortgage if he defaults, or liability for a slip and fall). If you're concerned though about legal (law) issues here, though, this isn't the place to ask those.

From a financial standpoint, there's nothing wrong with the arrangement you mention and it's very common. I would just note that you should personally consider it a gift, and just be happy if you eventually are repaid.


As far as the mortgage goes, it's up to your cousin to declare it or not, nothing on your side. Mortgage companies are pretty smart about that sort of thing, and one thing they'll want to look at are several bank statements - so a recent gift will look like a gift. Either way will be pretty similar in how they treat it - they'll raise the interest rate some or refuse to loan, if this is most or all of the down payment in particular. They can't be sure it's not a loan, so they treat it as if it were.

When it might come into relevance is if your cousin repays you then a month or two later defaults and declares bankruptcy or similar. The bank might then try to collect from you in that case, if it discovers the payment. I'm not a lawyer and don't have any idea of how successful they might be, but it's a possibility. Again, the fact that it's a loan doesn't matter there; it's just the evasion of his duty to pay the mortgage lender.

  • I was mainly worried about legal liability for misrepresenting the purpose of the payment, sorry for not stating that. I trust him enough to make the repayments, but I didn't want to be liable for mortgage fraud by stating it was a "gift" and then having the equivalent amount of money showing up in my account later when repayment is made – muzzlator May 16 '18 at 18:42
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    Oh, you mean that you're gifting your cousin $14k when he's applying for a loan? – Joe May 16 '18 at 18:46
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    Added some text there. If you have any questions though about the legal side of things, please contact a lawyer, this isn't a legal advice site - just financial advice. – Joe May 16 '18 at 19:09
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    "They won't differentiate between a loan and a gift; as long as there's no recourse on the property on your part, they don't care." I disagree. A loan necessarily cuts into available income on account of the loan payments that are supposed to be made, even if the OP and his cousin swear to high heaven that it is an interest-free loan, and the lender can be concerned that the borrower has insufficient income to support the mortgage payment in addition to the other obligations. – Dilip Sarwate May 16 '18 at 20:11
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    @DilipSarwate I agree with you fully; "They won't differentiate between a loan and a gift" is categorically untrue - the bank absolutely wants to know what is a loan and what is a gift, and lying about a loan by calling it a gift is most certainly fraud. – Grade 'Eh' Bacon May 16 '18 at 20:23
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Don't worry too much about it; your second cousin will need to submit the last few months of bank statements to the mortgage lender and the lender will certainly ask where that $14K deposit came from, and then demand that you submit a letter (probably notarized too) in which you will swear on your mother's grave that the money is a gift with no strings attached. Failing this, the lender will treat the money as an undisclosed loan which might well disqualify your cousin from getting a mortgage, or the lender will jack up the interest rate being offered in order to compensate for the higher risk of default. Note that you are entitled to give up to $15K per person per year without incurring gift tax, and as long as you haven't given (or intend to give) your cousin very extravagant birthday or Christmas gifts, you will be under the limit and don't need to file a gift tax return (Form 709). Your cousin will have an explanation for the gift (especially if you attach a brief letter to your check saying something like "Dear Cuz, Out of the goodness of my heart, I am giving you a gift of $14K. Best regards, Muzzlator". (Gifts are not taxable income to the recipient).

As far as "repayment" is considered, Dear Cuz can repay the amount in a lump sum (or in dribs and drabs over the years), preferably accompanied by similar letters addressed to you.

Now, with all the downvotes and declarations that this is actually a loan and that I am encouraging mortgage fraud by suggesting that the OP call it a gift when it is actually a loan, and the OP declaring that he ie going to avoid all the hassles and insist on calling that $14K a loan (or maybe even an interest-free loan) that Dear Cuz can repay whenever Dear Cuz feels like it, the OP needs to understand that even if he does not collect any cash interest from Dear Cuz, as far as the IRS is concerned, the OP is receiving taxable interest at at least the minimum rate that the IRS sets, and that this imputed interest income needs to be declared on the OP's tax return and taxes paid on it. Now, by not collecting the interest that the IRS imputes that the OP has received, the OP is making gifts each year to Dear Cuz in the amount of the annual interest deemed to have been earned (even though no cash is changing hands). The amount will be small enough that no gift tax return is required. In short, the OP is going to be out the tax on the interest deemed to have been earned each year from this loan.

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    This answer amounts to "misrepresent the source of your funds and you'll be fine", while completely ignoring the rather thorny issue of mortgage fraud. A gift with the expectation of repayment simply isn't a gift, and providing documents that state otherwise is just lying. – Nuclear Wang May 16 '18 at 20:43
  • @NuclearWang What is the definition of "expectation"? Are there any relevant legal documents about this? Also, thanks Dilip for taking time to answer! Glad to know I don't need to declare tax, if this gift were to happen – muzzlator May 16 '18 at 20:58
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    @muzzlator: If it's been agreed that your cousin will pay you back -- even at a time as vague as "eventually" or "someday" -- and you believe it, then you have an expectation of repayment. (Whether you'll ever see that money again is beside the point.) And when the lender is like "oh, he just up and gave $14k, huh?", three options arise. 1: You decide to be honest, call it a loan, and let it have its negative effect on the mortgage application. 2: You call it a gift, make it a gift, and you're out $14k. Or 3: You call it a gift but it's really a loan, and are now committing mortgage fraud. – cHao May 16 '18 at 21:53
  • Thanks chao for the clarification here, i've decided to not give the "gift" in the end, but instead offered a loan only (which may be useless to him, not sure yet) – muzzlator May 16 '18 at 23:36
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This is mortgage fraud. Stay away.

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