What Is a 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.
Understanding a Gift Letter
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 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.
For 2020, the IRS announced that the estate and gift tax exemption is $11.58 million per individual, up from $11.4 million in 2019.