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Running The Numbers On The Gift Tax

People are always asking, “with prices so high, how do people come up with the money to buy a house?”

Did you know that 30% of all first time homebuyers get assistance from their parents and 40% of all buyers get some parental assistance?

These numbers come from the National Association of Realtors and based on what we are seeing they seem pretty accurate. 

One question we get all the time is “what are the tax consequences if I give money to help my kids buy a house?”

The IRS considers money you give to an adult child or a friend a gift. These gifts need to be reported to the IRS. However, for most Americans, there will be no gift tax due.

If you are thinking of helping out your adult children or a friend, here is an example of how the gift tax works.

Mom can gift her son $17,000 per year and pay no gift tax. Dad can also gift that same son another $17,000 per year with no gift tax. Their son has now received a total of $34,000 in gift money. 

If their son is co purchasing the house with his spouse, mom and dad can both give their son’s spouse an additional $17,000 each. Now the son and his spouse have received a total of $68,000 and there is no gift tax to mom and dad.

If mom and dad have several children and grandchildren, they can both make this $17,000 gift to all ofthe kids and grandkids every year with no tax consequences as well. 

There is a catch though. Each person has a $12,920,000 lifetime gift tax exemption. Once this amount is exceeded the gift tax kicks in. 

So what happens if mom wants to gift her son $400,000 all in one year so he can buy a home? The $400,000 gift exceeds the $17,000 annual limit by $383,000. Will this create a taxable event?

Most likely not. The IRS will allow mom to reduce her $12,920,000 lifetime gift tax exemption by the amount she exceeded her $17,000 annual limit per person. 

In this case that would be $400,000 – $17,000 = $383,000.

Moving forward, mom’s remaining lifetime exemption of $12,920,000 is now reduced by $383,000 to a remaining lifetime exemption amount of $12,537,000.

The purpose of this article is to get the conversation started since a number of clients are asking about it. The gift tax exemption limits sunset at the end of 2024 and the amounts can change. If you are planning on gifting down payment money to family or friends, you should definitely talk to your tax accountant. My days as a tax account are long behind me and I am no longer qualified to give tax advice. 

Sidebar: Fun fact: It doesn’t seem to matter how old the kids are. Many people assume only kids in their 20’s need the extra help. You would be surprised how often parents are giving financial help to their 40, 50, and even 60 year old kids!

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