Gift tax on down payment

[wolverine41]

Hi all,

I am 6 months into practice and am looking into buying a vacant lot for a future home. My wife and I just paid off our loans (210K), make combined 530K / year and are saving 20% gross for retirement, 10K to 529.. That being said, a piece of land became available in a very desirable area that will not be around for long. As we have put "most" (i.e. all) of our extra cash towards loans, we have no way to buy the land. Our family has graciously agreed to forward the 240K for the land (which we will pay back in 2 years). No plans to build a home on it for a few years, at least until we can pay off land and use that a nice down payment.

My question is if this will pose a gift tax problem. Ive read that 14K can be given a year, or else it goes toward the lifetime limit (of 5.5 mil). Other than going toward the limit, the "gifter" should not incur any extra penalty or taxes, correct?

 

[The White Coat Investor]

How about you all gift as much as possible without using gift tax limits, then borrow the rest from them at the IRS dictated minimum interest rate?

For example, your mom can gift you and your wife each $14K. Your dad can gift you and your wife each $14K. So that's $56K. If there are more family members involved, you could do more.

Also, bear in mind that for family members who will be nowhere near an estate tax problem, the gift tax isn't a big deal. It isn't a real tax; it's a reduction in the estate tax exemption.

After you pay off the loan, you can gift them all back $14K a year without having to file gift tax forms.

[retinadoc]

There is not any additional penalty from what I have read, though your family would have to file paperwork indicating that they have sent you a gift of $XXX (so the IRS can track how much has been given total).

I don't know much about this, but another option may be to structure this as a loan, which may be better if your family is anticipating running into issues with estate taxes.

[wolverine41]

Im not sure their will be a estate tax issue in the future, but good ideas about structuring as a loan. That shouldn't be an issue bc its not part of a down payment (which sometimes banks would frown upon), and the plan would be not to borrow for construction until loan is paid off.

How does the IRS dictated minimum rate work ? I looked up the schedule here:

https://www.irs.gov/pub/irs-drop/rr-17-07.pdf

Is this filed with taxes or just documented by both parties that a loan for X dollars was given at X rate and payoff time?

[Kamban]

wolverine41 wrote:

Our family has graciously agreed to forward the 240K for the land (which we will pay back in 2 years). No plans to build a home on it for a few years, at least until we can pay off land and use that a nice down payment.

Click to expand...

Another option would be to have your family buy the land in their name ( if it is just your parents) and you can buy it from them in 2 years for that price and the property taxes paid during the time it was held by your family member. Maybe an appreciated price if they wish.

[jfoxcpacfp]

wolverine41 wrote:

I am 6 months into practice and am looking into buying a vacant lot for a future home. My wife and I just paid off our loans (210K), make combined 530K / year and are saving 20% gross for retirement, 10K to 529.. That being said, a piece of land became available in a very desirable area that will not be around for long. As we have put “most” (i.e. all) of our extra cash towards loans, we have no way to buy the land. Our family has graciously agreed to forward the 240K for the land (which we will pay back in 2 years). No plans to build a home on it for a few years, at least until we can pay off land and use that a nice down payment.

My question is if this will pose a gift tax problem. Ive read that 14K can be given a year, or else it goes toward the lifetime limit (of 5.5 mil). Other than going toward the limit, the “gifter” should not incur any extra penalty or taxes, correct?

Click to expand...

This is a simple family loan. The only gift involved will be a minor calculation for IRS AFR interest if they do not charge you any interest. Since the calculation for March 2017 is below $14k for a 2-year loan, there would be no gift tax return required (assuming the value of other gifts during the applicable period did not push your total gifts received from your family over $14k per year per person per donor).

[Craigy]

Will it be a gift or will it be a loan?  Either has its own implications.

However, you say you have "no way to buy the land."  Why is that?  Somehow ineligible for financing?  Given your income, banks should be more than willing to lend, seller might be willing to lend, etc.