how gift letters work
gift letters are important because in general lenders tend to frown upon borrowers using additional borrowed money for a down payment on a home or other property gifted money however is a different story a gift letter specifically references the fact that money is a gift and not a loan the gift giver must directly write the letter for it to have any validity the letter also often discloses the relationship between the gift giver and receiver a gift can be broadly defined to include a sale exchange or other transfer of property from one person the donor to another the recipient common forms of gifts include all gifts that exceed an annually determined amount are subject to income taxes if they are made to someone other than a spouse or qualified charity 3gift letters are legally binding and must be signed by at least the donor who does not expect to be repaid gift letter and additional gifting strategiesseveral gifting strategies rest on gift letters for example inter vivos gifting occurs while an individual is still alive and can reduce the taxable estate since the individual no longer owns the property when they die although inter vivos gifts may still be subject to taxes if made three years before that individual s death 45 for 2023 the estate and gift tax exemption is 12 920 000 per individual up from 12 060 000 in 2022 1many individuals choose to gift assets that will appreciate substantially in the future such as real estate particularly if it hasn t increased in value already this excludes its present worth from the donor s estate and also eliminates future appreciation from the estate in contrast gifting assets that have already increased significantly in value is less advantageous as the recipient will have the same tax basis carryover basis in the property as the donor if the recipient were to inherit that asset rather than receive it as a gift during the donor s life the asset s tax basis would be stepped up to the fair market value of the property at the time of death 678gift letters and mortgagesgift letters often heavily relate to real estate transactions consider a situation where a parent provides 100 000 of capital to their child for a down payment for a house in this situation the lender will likely want security that this money is a one sided transaction that is not to be repaid as part of qualifying for a home loan the lender may require both the donor and recipient to sign the letter agreeing that the funds are a gift a lender may request a gift letter if it recognizes abnormal or large transactions being deposited into a borrower s account contents of a gift letterthere is no singular universally accepted template for gift letters in general a party that requires a gift letter will often require the following contents 