Rental Property Investor · Austin, TX · Member since 2017 · 26 posts · 14 votes
Hello Everyone,
If my mother is to gift me $50k and I set up a payment plan to repay her, how does that work with taxes? I had never heard of being taxed on a gift (silly me). I was originally going to use the gift as a down payment but I learned that gifts can't be used to purchase property, until it becomes "seasoned". I DO NOT want pay taxes on any kind of money that my mom gives.
What I want to do is use my mutual funds to purchase a property and replenish the mutual fund with the 50k to make interest, while paying back my mom with no interest.
Does anyone have experience with gift taxing? The last thing I ever want to do is pay the government twice.
Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes
8y
What you are describing is a loan. Repayment of loans are not taxable, but the interest (must charge at least AFR) would be taxable to your mother and deducted by you.
If it was a gift, it would not be taxable to you. Receipts of gifts are not taxable. They are taxable to the donor, but as was previously described there is a $14k annual exclusion to each donee, and a lifetime exclusion worth approximately $5.5 million and growing with inflation (may double in 2017 under the tax reform bill). Even though there is no gift tax, your mother would be required to file a gift tax return.
Real Estate Broker · DFW · Member since 2015 · 350 posts · 270 votes
8y
Each year there’s a gift exemption of 14k per year.
Lifetime gift/estate tax for individuals is around $5.5m.
So if the person giving you the money hasn’t exceeded that limit they and you won’t have to pay tax on it
Rental Property Investor · Rowland Heights, CA · Member since 2015 · 73 posts · 22 votes
8y
@Account Closed
If you are going to repay the money then why wouldnt you treat this as a personal loan at a very very low interest rate, 1%? This is a legit transaction and could be included into a RE transaction as funding of the down. Another option is to have her be a 2nd loan on the property you are planning to buy thus making it part of the transaction. This is what my parents did to help me buy my first property and it worked very well. In a few years I refinanced and paid it off.
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
8y
@Account Closed gifts in excess of $14k annually are not taxed as long as the lifetime gift exclusion ($5,490,000 for 2017) is still available for the taxpayer. The excess over $14k simply reduces the lifetime exclusion amount.
BUT, and this is a big but, what you are describing is a loan, not a gift. A gift is one in which you receive value for no expectation of reciprocating value. How would you explain the payback if questioned by an IRS auditor?
Each year there’s a gift exemption of 14k per year.
Lifetime gift/estate tax for individuals is around $5.5m.
So if the person giving you the money hasn’t exceeded that limit they and you won’t have to pay tax on it
Can't you increase that too by having ea parent gift at Max and then hypothetically if he was filling jointly same gift to the other person to get to 56k?
Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes
8y
What you are describing is a loan. Repayment of loans are not taxable, but the interest (must charge at least AFR) would be taxable to your mother and deducted by you.
If it was a gift, it would not be taxable to you. Receipts of gifts are not taxable. They are taxable to the donor, but as was previously described there is a $14k annual exclusion to each donee, and a lifetime exclusion worth approximately $5.5 million and growing with inflation (may double in 2017 under the tax reform bill). Even though there is no gift tax, your mother would be required to file a gift tax return.
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
8y
@Account Closed thanks for attending!
You would need to file a Form 1099 and issue that to your mother to report the interest paid (assuming the $50k loan is not collateralized. Y the asset). You would also deduct the interest in Sch A if a primary residence or Sch E if a rental.
The concern I'd have is that your lender may not want to see this $50k classified as a loan. It will increase your DTI, so be cognizant of that.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
8y
@Account Closed it is a loan and you would need to report it to IRS and so would your mother as interest income. If you try to do something like this under the table, your mother could get hit with a gift tax bill from the IRS. If you don't pay interest, the IRS may impute interest for your mother to pay. The banks may see the loan different than cash. Technically, it is $50K in additional outstanding debt.
As far as your comment about the $50K being $36K over the limit, you already stated you are repaying the money. That means ALL the money is a loan. You really shouldn't be claiming $14K as a gift, then repaying it. I guess you could say it is a gift back to her. I would just caution you to be careful where the IRS is involved. They can be pretty nasty.