First-time New York City buyers are pouring into the market these days—and many of them plan on using a gift from Mom and Dad in order to buy. If you’re one of these lucky buyers, there are a few things to be aware of when purchasing with a gift.
For starters, there's much less of a stigma surrounding young adults who need help from their parents, a reflection of just how expensive it is to buy here. In fact, the phenomenon of parents buying a place for their adult children in NYC “is becoming a more typical state of affairs rather than the privilege it was viewed as earlier,” Dean Roberts, a co-op and condo attorney at Norris McLaughlin, previously told Brick.
He says the trend is likely to grow as parents help their grown children who moved home during the pandemic leave the nest again—this time as buyers looking to capitalize on price drops in NYC and low interest rates.
But even when you are using a gift to buy, you will need to find out how much of the purchase price needs to be in your own funds, if any.
Rules vary from bank to bank, says Melissa Cohn, executive mortgage banker at William Raveis Mortgage. Some follow Fannie Mae and Freddie Mac guidelines on buying with a gift, which do not require a contribution from the borrower to complete a transaction with 80 percent or less financing.
Generally, she says, if you want 90 percent financing, you will need 3 to 5 percent of the purchase price in your own funds, she says. You also need to determine whether a gift can be used for your down payment and closing costs. Again, different banks have different restrictions on this.
Of course, you’ll still have to demonstrate your own financial fitness. Co-ops will want to see that you have sufficient assets of your own to cover your monthlies. You’ll need to demonstrate that you’re financially capable and have the right debt-to-income ratio and post-closing liquidity.
Getting a gift from someone other than mom and dad? Under Fannie Mae guidelines, acceptable donors can be an immediate family member, such as a spouse, child, dependent, or any “individual who is related to the borrower by blood, marriage, adoption, or legal guardianship.” A fiancé, fiancée, or domestic partner also qualifies.
Who can’t be a donor? Anyone who has an interest in your transaction, like the builder, developer, or real estate agent.
To be approved by your bank, you are going to need a gift letter from your parents or other donor, which states that these are not borrowed funds and that they do not need to be paid back. The gift letter should also spell out the donor’s relationship to the borrower and provide contact information.
In order for your bank to clear you to close, you are going to have to show that the funds are in your parent’s account and are available to you, or have already been transferred to you, in which case you would provide your bank statement and a copy of a canceled check.
What if the gift isn’t actually a gift but in fact a loan that you eventually need to pay back to your parents? In that case, you could jeopardize your loan from the bank.
If the bank has any sense that what you are getting from your parents needs to be repaid, then the bank would consider you to be getting 100 percent financing, Cohn says. (Generally, the maximum banks are going to loan is 90 percent.) And if a family member is giving you a loan, then it would need to be structured like a true loan, with an acceptable rate, and factored into your monthly payments.
Maybe your parents want to help you buy, but don’t have cash on hand to assist you. If they own their home, they still might be able to. Some parents use the proceeds from a home equity loan to give a gift, Cohn says.
“There are lot of parents who have equity in their homes but not a lot of cash,” Cohn says. “This way you can still use the bank of mom and dad.”
How a gift impacts taxes
Whether or not giving a gift results in additional taxes depends on the amount of the gift—and for the most part, few people end up owing taxes on a gift. Some just owe some paperwork—here's breakdown of what you can expect.
Essentially, if your parent is from the U.S., they can give up to $15,000 with no tax or filing requirement for you or them (gift recipients in general do not have filing requirements, although there are some exceptions, according to Nerd Wallet.) That means each parent can give up to $15,000 for a total of $30,000 a year with no tax or filing necessary. That's because individuals have a $15,000 annual gift exclusion.
Once a gift exceeds that $15,000, the donor is required to report the gift by filing IRS form 709 but there is no tax liability. Taxes come into play once you cross the seemingly rarefied lifetime exclusion limit, which rises to $11.7 million in 2021, up from $11.58 million in 2020.
Essentially, your parents are supposed to notify the IRS when they hand out smaller annual gifts that count toward their lifetime threshold, says Brett Perkins, co-managing partner at TRPF CPAs.
There's a major wrinkle to be aware of: When the donor is international and gifting a person in the U.S., if the gift is $100,000 or more, the donor doesn't have to do a gift tax filing, but the recipient is required to report the gift, an IRS form 3520. Failure to do so could mean incurring severe penalties.
And while it's true that the gift letter you give to a bank laying out the details of your transaction does not go to the IRS, CPAs recommends parents take the extra step of filing the necessary notice to the IRS. It's just “good housekeeping,” Perkins says.
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