Gift or loan?

July 15, 2005 2:22 PM

I'm buying property in California with a down payment from my mother in Switzerland. Is it better to call it a loan or a gift (for tax and legal reasons)?
posted by letitrain to Work & Money (19 answers total)

How big is the down payment?
posted by kindall at 2:30 PM on July 15, 2005

Response by poster: $30,000.
posted by letitrain at 2:36 PM on July 15, 2005

If you call it a loan, then the other lenders will count it as requiring repayments when they consider lending to you. This may affect your interest rate/borrowing power.

If you call it a gift, they like to have a signed declaration by all parties stating that repayment is not required. They also like to see that it's been in your account for ~30 days or so.

I'm guessing that there's no interest on this, so from a tax point of view it shouldn't make any difference.
posted by 5MeoCMP at 2:37 PM on July 15, 2005

I am not an accountant, nor a tax attorney. However, I believe that neither a loan nor a gift accrues as taxable income to you. For purposes of getting financing you will need to state whether it is a loan or gift. If you say loan, they will factor that expense into how much debt you can carry, that is it will be a negative.

[or what 5MeoCMP said]
posted by caddis at 2:39 PM on July 15, 2005

If your mother is a U.S. citizen she will have to pay gift tax. Some other countries have laws on large gifts as well, to prevent people from using gifts to get around estate taxes.
posted by grouse at 2:41 PM on July 15, 2005

I believe that neither a loan nor a gift accrues as taxable income to you.

My understanding is that you're only allowed a "gift" of up to $11K/year from any individual before the tax man starts considering it income.

More here.
posted by _sirmissalot_ at 2:45 PM on July 15, 2005

I have a friend who just received a substantial loan from his wife's parents to help pay for the downpayment on the house. His wife was a bit of a stickler. She kept trying to ask their mortgage broker what to do. The mortgage broker kept telling them, "If you tell me that you got a loan, I'll have to reduce the amount I can lend you. If you tell me that you got a gift, I will not report anything to the IRS. So you talk to your parents and decide whether it is a loan or a gift and then let me know. To repeat, if you tell me that it is a gift, I will not report anything to the IRS."

So they got the loan from her parents, told the mortgage broker it was a gift, and bought their house.
posted by alms at 2:46 PM on July 15, 2005

I had to deal with this last year. Also, from the IRS - Gift Tax Questions.
posted by ericb at 2:47 PM on July 15, 2005

Whether you call it a loan or a gift, if you never pay it back it is a gift for estate tax purposes. Of course, thanks to the GOP the estate tax is about to disappear.
posted by caddis at 2:47 PM on July 15, 2005

My understanding is that you're only allowed a "gift" of up to $11K/year from any individual before the tax man starts considering it income

No, a person is allowed to give up to $11K per year before that person (the giver) starts to owe taxes (if a US citizen). (Double the limit if it's a couple who file jointly.) Details are in the link that was provided. The recipient incurs no tax liability, regardless of the amount of money received.
posted by WestCoaster at 3:11 PM on July 15, 2005

When we bought our house (in Ohio), our realtor told us that loaned money could not be used for a down payment. I don't know if that was because we went through FHA or just in general though.
posted by ferociouskitty at 3:48 PM on July 15, 2005

What I am about to say sounds a bit self righteous but here goes--why don't you call it what it is--is it a loan or a gift. Perhaps the truth will produce the best long term result for you--treating it as a gift when it is in fact a loan can be a set up for long term financial problems and calling it a loan on legal documents when it is a gift may have its own implications--on principle--I do not provide inaccurate information on such things as insurance forms/claims, IRS documents, loan documents, marriage licenses, or anything else which is important to me and may come back and haunt in ways I do not want to think about--I really do not mean to be moralizing--sometimes the truth provides the most clarity and frame of reference for making decisions
posted by rmhsinc at 4:14 PM on July 15, 2005

Good call, WestCoaster. I was definitely under the wrong impression. IRS clarification here.

Now if only I could get my paycheck as "a gift" . . .
posted by _sirmissalot_ at 4:31 PM on July 15, 2005

You also want to avoid paying PMI (private mortgage insurance). To avoid paying it you need to have a 20% equity in the home. That's a good reason to make the money a "gift".
posted by joseppi7 at 4:42 PM on July 15, 2005

Response by poster: rmhsinc, I can structure it as a gift or a loan, not just report it that way. The only question was which was better for tax and legal reasons - I won't be dishonest about the arrangement I choose. I should have made that more clear, but I was trying to keep the question succinct.

joseppl7, I just got back from a meeting with the credit union. It will definitely be a gift for that very reason.

Thanks for the responses. The gift tax info was especially helpful.
posted by letitrain at 6:36 PM on July 15, 2005

Best answer: There's been some misinformation about gift taxes here. You can give 11k per year to another person without paying gift tax. BUT you also have a $1,000,000 lifetime allowance above and beyond that 11k per year. Two points follow from that:

First, letitrain would face no tax consequences from a gift regardless of its size. The person giving the gift is responsible for the taxes, not the person receiving it. Second, unless letitrain has received over $981,000 in taxable gifts from his mom already, she will owe no taxes and this gift may be written off against the $1,000,000 lifetime allowance. And if letitrain has received that much already, I'm guessing he wouldn't be worried about 7 or 8 thou in taxes.

So: I'd take it as a gift. Much simpler all around.

Disclaimer: I am not a tax attorney, but I did stay at a Holiday Inn Express last night.
posted by Justinian at 7:32 PM on July 15, 2005

One addendum: That info applies to U.S. CITIZENS. It occurs to me that if letitrain's mom lives in Switzerland she may well not be a US citizen and this info is not specified.

I don't have any idea how the gift tax works for non-U.S. citizens giving to U.S. citizens. If your mom is not a US citizen the above info may not apply and it is probably time to consult someone.
posted by Justinian at 8:23 PM on July 15, 2005

The person giving the gift is responsible for the taxes, not the person receiving it.

Then what was the deal with the Oprah car giveaway thing last year?
posted by dirigibleman at 11:01 PM on July 16, 2005

Winnings from contests and game shows are taxable income. I imagine that the IRS would be very suspicious of a "gift" from Oprah to dozens of random strangers and would argue that it is income. You need somewhat of a closer personal connection than that to get away with calling it a gift.
posted by kindall at 11:46 PM on July 16, 2005