DEFINITION of 'Gift Letter'

A gift letter is written correspondence explicitly stating that money received from a friend or relative is a gift. Gift letters often come into play when a borrower has received assistance in making a down payment on a new home or other real estate property. Such letters state that the money received is not expected to be paid back in any way, shape or form.


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 the 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 gifts include:

  • Cash, check or other tangible items
  • Transferring a title to stocks or real property without receiving anything in exchange of value
  • Forgiving debt
  • Below-market loans

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.

Gift Letter and Additional Gifting Strategies

Several 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).

Many 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. By contrast, gifting assets that have already increased significantly in value is less advantageous as the recipient will have the same tax basis (carry over basis) in the property as the donor. If the recipient were to inherit the asset rather than receive a gift during the donor's life, the asset is stepped up to the fair market value of the property at the time of death.

In 2017, the IRS announced that the estate and gift tax exemption is $5.49 million per individual. This is an increase from $5.45 million in 2016.

  1. Gift Inter Vivos

    A gift inter vivos, which is Latin for between the living, is ...
  2. Gift Tax

    A federal tax applied to people giving anything of value to another ...
  3. Gift in Trust

    A gift in trust is an indirect bequest of assets to a beneficiary ...
  4. Three-Year Rule

    The three-year rule refers to Section 2035 of the U.S. tax code.
  5. Bequest

    A bequest is an act of giving personal property or financial ...
  6. Uniform Transfer Tax

    Uniform transfer tax refers to a combination of two kinds of ...
Related Articles
  1. Taxes

    What Are Gift Taxes?

    If you're not sure what gift taxes are, read on and we'll explain.
  2. Insights

    Gift-Giving Etiquette

    Here's a look at how much you should spend and what you should give this holiday season.
  3. Retirement

    4 Thoughtful Retirement Gift Ideas for Men

    This"best gifts list" of the most thoughtful retirement gifts for men includes items appropriate as gifts from co-workers, friends or family members.
  4. Insights

    Why Retailers Love Gift Cards

    Gift cards have many benefits for retailers compared to cash sales. We'll look at a few of them.
  5. Personal Finance

    Top Websites For Discounted Gift Cards

    Gift cards can cost less when you buy them through a discount website. Just do the math before you cough up the cash.
  6. Investing

    How Safe Are Discounted Gift Card Websites?

    Could you buy a gift card online and find out it's worthless? Here's how to protect yourself (and whether you need to).
  7. Personal Finance

    The Smarter Way to Make a College Tuition Gift

    Most college students would be happy to receive help in paying their tuition, just be sure your gift doesn't hurt their financial aid.
  8. Taxes

    Keep Gifts Simple and Meaningful This Season

    Sometimes simple gift ideas are the best.
  9. Taxes

    How to Give a Tax-Saving Gift Before The Year Ends

    Giving to charity and family members before year-end can help you save on 2016 taxes.
  1. How do you file IRS Form 709?

    IRS Form 709 is for reporting gifts subject to gift and generation-skipping transfer taxes. Learn how to file IRS Form 7 ... Read Answer >>
Trading Center