Gift Letter Definition

What Is a Gift Letter?

A gift letter is a piece of legal, written correspondence explicitly stating that money received from a friend or relative is a gift. Gift letters for tax purposes 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.

Key Takeaways

  • A gift letter is a piece of legal, written correspondence explicitly stating that money received from a friend or relative is a gift.
  • Gift letters are important when it comes to paying a real estate down payment, for example, because lenders tend to frown upon borrowers using additional borrowed money for a down payment on a home or other property. However, gifts are acceptable.
  • For 2022, the estate and gift tax exemption is $12,060,000 per individual.

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:

  • 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 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 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 2022, the estate and gift tax exemption is $12,060,000 per individual, up from $11,700,000 in 2021.

Article Sources
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  1. Internal Revenue Service. "Estate Tax."

  2. Internal Revenue Service. "Instructions for Form 709 (2021)."

  3. Internal Revenue Service. "Property (Basis, Sale of Home, Etc.)"

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