What Is a Gift Letter?
Let me explain what a gift letter really is. It's a straightforward legal document where someone writes that the money they've given you from a friend or relative is purely a gift. You'll often see these in action when you're getting help with a down payment on a house or some other property. The key point here is that the letter makes it clear there's no expectation of repayment in any form.
Key Takeaways
Here's what you need to know right away. A gift letter is that legal note confirming the money is a gift from family or friends. It's crucial for things like real estate down payments because lenders don't like it when you use borrowed money for that—gifts, though, are fine. Your bank might demand one before approving your loan. Remember, the estate and gift tax exemption was $12,060,000 per person in 2022 and jumped to $12,920,000 in 2023. These letters typically list the donor's info, a no-repayment statement, and their signature.
How Gift Letters Work
You should understand how these letters function in practice. Lenders generally dislike borrowers stacking more loans on top for down payments on homes or properties, but gifted funds are acceptable. The letter spells out that it's a gift, not a loan, and it has to come directly from the giver to be valid. It usually mentions your relationship to them too.
Think of a gift as any transfer of property without getting value back— that could be cash, stocks, forgiving a debt, or even low-interest loans. If gifts go over the annual limit and aren't to a spouse or charity, they might trigger income taxes.
Gift Letter and Additional Gifting Strategies
Gift letters tie into bigger strategies for giving. Take inter vivos gifting, which happens while you're alive and can shrink your taxable estate since you don't own the asset at death—though watch out for taxes if it's within three years of passing. With the 2023 exemption at $12,920,000, up from 2022's $12,060,000, it's a smart move.
People often gift assets set to grow in value, like real estate that hasn't appreciated yet. This keeps the current value and future gains out of your estate. But if it's already appreciated, the recipient gets your tax basis, which isn't ideal—better to inherit for a step-up in basis to fair market value at death.
Gift Letters and Mortgages
These letters are especially relevant in real estate deals. Say a parent gives you $100,000 for a house down payment—the lender will want proof it's a gift, not a loan you'd have to repay. Both you and the donor might need to sign it as part of loan approval. Lenders often spot big deposits and request a letter to confirm they're gifts.
Contents of a Gift Letter
There's no one-size-fits-all template, but expect certain basics if someone requires it. You'll need the donor's name, your name as recipient, their contact details like address and phone, how they're related to you, the exact gift amount (or estimated for non-cash, with proof), the date it was given, and a clear statement that it's a gift with no repayment expected.
Do Gift Letters Get Reported to the IRS?
The IRS might need written proof for charitable gifts, like donations without expecting anything back. These letters help substantiate that.
Why Do Lenders Require Gift Letters?
Lenders assess your risk as a borrower, and there's a big difference between a gift and a loan. They use the letter to check your full financial picture and any hidden obligations.
Are Gift Letters Legally Binding?
Yes, they are binding. Multiple parties rely on the info, so both donor and recipient are held to the terms once signed.
The Bottom Line
In essence, a gift letter is your signed proof that a lump sum from someone is a true gift, no strings attached. Lenders often insist on it for mortgages, especially when large amounts show up before a property buy.
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