A gift letter is a piece of legal, written correspondence explicitly stating that money received from a friend or relative is a gift.
The most common use of gift letters is 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. If you have received a gift from friends or family in order to buy property, your mortgage provider may require you to sign a gift letter.
In this guide, we’ll look at what a gift letter is, how and why you can use one, and what the tax implications of gifts are.
- 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.
- As of 2022, the IRS says that the annual exclusion on a gift per person per year is $16,000. This means the donor will have to pay taxes and file a gift tax return on any amount above that.
What Is a Gift Letter?
A gift letter is a formal document proving that money you have received is a gift, not a loan, and that the donor has no expectations you will pay the money back.
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
- Forgiving debt
- Below-market loans
Though gift letters can cover any kind of gift, made for any purpose, they are most commonly used during the process of applying for a mortgage to buy property. If you are buying property, and have received a monetary gift that you plan to use toward a mortgage down payment or closing costs, you must provide a gift letter to prove that the money is not a loan. During the underwriting process for a mortgage loan, lenders may check a loan applicant’s financial status and verify they have the means to repay the loan.
For example, suppose you just got married and your grandparents gave you $5,000 as a wedding gift. You can use this money toward a down payment and closing costs on a home, but in order to do so you’ll have to reassure your mortgage provider that it wasn’t a loan. To do that, you have your grandparents draw up a gift letter that you can then give to a mortgage lender. The gift letter will indicate their relationship to you, the exact amount and source of the funds, and state that you’re under no obligation to pay it back.
While gift letters are most common with mortgage down payments, they can be provided for estate planning purposes or with a gift of equity. An equity gift letter accompanies a home sale below market value. This usually occurs when someone gifts real estate property to a relative.
If you plan on using wedding gift money to put a down payment on a home, make sure it comes from an eligible donor. Gift letter requirements and acceptable donors vary by mortgage loan type.
How To Use a Gift Letter
Gift letters follow a fairly standard format, but some mortgage lenders (or other financial institutions) prefer you to use a template.
In general, the person giving the gift must write and sign the gift letter. Ideally, they should provide the gift letter at the time of the gift, but this doesn’t always happen and the letter may be written and signed at a later date.
Because gift letters are a fairly common part of the mortgage underwriting process, mortgage lenders will have a template available or you can find one online. A gift letter should include the following information:
- The exact dollar amount of the gift
- The donor’s name, address, and phone number
- The donor’s relationship to the loan applicant
- The date the funds were or will be transferred
- A statement that no repayment is expected
- The address of the property being purchased (if known at the time)
- The recipient and donor’s signatures
If your mortgage lender doesn’t provide you with a template, check with them as to what information they require. Otherwise your application may be delayed.
Bear in mind that your mortgage lender may well look into the circumstances of the gift, and may ask you for more information or evidence about it. This could include bank statements, check copies, and proof of wire transfer. This research is done to validate your financial situation, assess risk, and ensure you can repay the loan you are applying the gifted money to.
It’s possible to use multiple gifts towards your down payment, but you’ll need a separate gift letter for each one.
Check with your mortgage provider what evidence you should provide with a gift letter—otherwise, your application may be delayed.
Gifts and Taxes
Not all gifts are taxable. Gifts that fall into the following categories are not taxable:
- Gifts that are not more than the annual exclusion for the calendar year (in 2022, this is $16,000)
- Tuition or medical expenses you pay for someone else
- Gifts to your spouse. Married couples may take advantage of a “gift splitting” tax rule and give up to $30,000 combined without incurring tax penalties
- Gifts to a political organization
If a gift is taxable, the donor is usually the one who pays the gift tax unless the gift recipient makes an arrangement to pay it.
As of 2022, the IRS says that the annual exclusion on a gift per person per year is $16,000. This means the donor will have to pay taxes and file a gift tax return on any amount above that. For example, if someone gives you $25,000, they will have to pay taxes on the amount over the annual exclusion, which is $9,000 in this case.
Lastly, be aware that even if gift amounts fall within the IRS gift exclusions and exemptions, donors will still need to file a tax return so their donations can be counted toward their lifetime tax exemption.
Which Gifts Are Not Taxable?
You don’t pay taxes on some types of gifts. These include gifts that are not more than the annual exclusion for the calendar year, tuition or medical expenses, gifts to your spouse, or gifts to a political organization.
Is a Gift Letter Legally Binding?
Yes. Because the paperwork for your loan is entered into the record, a gift letter is then a legally binding document.
How Do I Write a Gift Letter?
Most mortgage providers will have a template you can follow, but in general your gift letter should include the donor's name, address and phone number; the donor's relationship to the client; the dollar amount of the gift; the date the funds were transferred; a statement from the donor that no repayment is expected; the donor's signature; and the address of the property being purchased, if known.
The Bottom Line
A gift letter is a formal document proving that money you have received is a gift, not a loan, and that the donor has no expectations you will pay the money back. Though gift letters can cover any kind of gift, made for any purpose, they are most commonly used during the process of applying for a mortgage to buy property.
As of 2022, the IRS says that the annual exclusion on a gift per person per year is $16,000. This means the donor will have to pay taxes and file a gift tax return on any amount above that.