Hey, we're gonna talk about gifting equity if you've been if you've
ever bought a house Or if you're a parent and you wanted to sell
a house to a child And you're not selling it for fair market value
like an example like if you wanted to sell it at a cheaper price
You may have heard of like the term Like gift of equity.
It's usually lenders when they're asking about it.
I'm just gonna walk you through a scenario of If you need to gift
someone equity in an asset that you're selling Usually real estate,
but I'm gonna I'm gonna bring up some of the gift tax implications and
So we've covered that in the past, but I'm gonna talk about just what
you need to do if you're gifting really anything and then kind
of some common things we see that lenders request like a gift letter.
Um, like they might want a gift letter just kind of breaking down.
And what it actually is. So a gift of equity,
the most common example we see is when there's a,
there's a child or a family member that wants to buy a house from
their parents or their grandparents.
And the parents, they're fine selling the house at a lower price
than the fair market value. So as an example,
let's say it's a $400,000 house and they want to sell the house to
their kids for $300,000. But the kids,
they want to go and get a loan on this. And so what can
happen? Cause you know like when you're getting a loan,
there's usually a down payment return. And if you need to like say
like in investment properties, you usually need to put like 25 or 30% down.
Some personal loans you need to put down like 5 or 10 or sometimes
20 or 30% depending on the umm just depending on the loan depending
on your income debt.
But it's a common request that they will ask for a gift
letter when there's some of this gift of equity.
And it's usually just related to the lenders needing that.
So what happens from a lending perspective,
the lender will allow you to get a loan and they can calculate,
they can use the fair market value, save $400,000.
They can use that as the sales price. So if you're,
if you work at a title company or if you've seen those settlement statements,
the sales price can actually show $400,000.
And that will help the bank be happy with the loan they're getting.
But then at the settlement, in that settlement statement,
that shows what the buyer gets and what the seller gets and what,
what they're each paying for. The seller,
the parent, is giving up some of this equity.
And so when they're doing that, there's this gift of equity.
Underwriters usually start to get uptight about it.
And they want all sorts of documentation. And that's when they ask for the
gift letter. And as a CPA, I've written quite a few of those or
they'll request from the CPA firm that we just kind of document that there's
a gift letter and it's not alone in that.
The parent is gifting something of equity or the equity to
the child. So it's not a huge deal but sometimes it's just some documentation.
So when we usually come in, so not all the time,
we don't need to write the letter but we have clients reaching out about
it. Sometimes the parent can just write the letter.
This is a gift not alone. But the question that usually comes up
and what people start to worry about is the gift tax implications.
They get really worried about it. Like the child,
they're like I'm getting a gift of a hundred thousand dollars of equity.
I don't want to pay tax on that. and the parent or the grandparent,
they're worried that they're going to pay tax because they're gifting a hundred thousand
dollars of equity. What happens is if you've looked
into the gift tax law and you might not have,
but some of you you might have come across or you've looked at.
If you're each year you can give away $17,000
of value to anyone,
to anyone. Like you could pick a hundred people and give each of them
$17,000 and there's no documentation,
no you don't have to file any. You can give tax return,
there's no additional taxes to be paid up to $17,000 a year.
Usually people aren't giving money to strangers and so what some people do if
they've got excess cash and their uh their net worth is getting up there
they can gift this money away to their kids,
their grandkids, the spouses of their kids, they can do 17,000 a year with
no reporting at all. But now in this example we just talked about there's
a hundred thousand dollars going so what is that?
83,000 more than the 17,000 like 7.8.8 you
can give away without any documentation at all.
So here's what happens at the end of the year,
there is a gift tax return.
So when you're doing this gift letter and you're gifting equity,
just remember in the back of your mind,
you need to, if you are the parent.
The parent the grandparent, the giver of the money,
the giver of the equity, they need to file a gift tax return.
The recipient doesn't need to file anything.
So if you're the one getting the loan in this example, you don't need
to file anything, you're not paying any gift taxes.
It's the person giving the money the way.
It's the- it's their responsibility to file a gift tax return.
So when you're filing the gift tax return, so everyone,
everyone in the United States, whoever it is, and you can give away,
it's up to about $13 million a year.
Sorry, $13 million in- $13 million lifetime,
not a year. $13 million in your lifetime that you can give away completely
gift tax free. You don't have to pay any gift tax on it,
you don't have to pay any estate tax on it. But if you died,
say you had a net worth of $14 million,
so you're- $1 million over the limit.
If you died, you're $1 million over the limit,
you would have an estate tax to pay on that excess.
And the estate tax is 40%.
It's insane. And it's very similar,
like really the same law applies if you- you were to give away $14
million. So you gave away $14 million in a year.
You're a million dollars over the limit that you can gift in your lifetime.
You've got to pay tax on the excess. So what this gift tax return
does, it tracks how much you've given over your lifetime.
So f- you file one in one year. It's just kind of a log
for how much you've given away in your life over that $17,000 annual limit.
I know if this is the first time you're here in this, you're probably
thinking this is just insane. And it kind of is a lot of the
tax law is insane. But now on this gift.
So tax return. Remember you can give away $13 million in your lifetime.
You went $83,000 over your limit.
So now the gift tax return. There's no tax on it still.
But it's just reporting that you've used up some of the $13 million.
Take $13 million subtract out $83,000.
That remaining amount is how much you can give away in your lifetime as
a gift. Or after you die,
it's how much people can inherit from you completely tax free.
So that's the the gift tax laws with that.
And so like a simple gift of equity.
It. Like that.
It's not it's really not more complicated than that than what I just explained.
Some people get really worried about it.
They'll cancel a deal. They sometimes they don't want to send it to sell
it to their kids or a related party. They just get really worried about
the tax implications. It's really not.
Not that big of a deal. Just track how much equity was given.
Send it in at the end of the year. When you're filing your tax
return, make sure someone can file a gift tax return for you.
And there's not a lot of documentation needed.
It's just documentation for how- what that- that value was.
And that's all- that's all you need to do to report it.
Umm, so that's it.
That we've covered the gift tax. The gift letter.
Sometimes they might need those if you're doing it with the bank.
The banks and underwriters just get more comfortable with the gift letter.
Remember the gift taxes you can give away about- 17,000 a year and that-
that fluctuates with inflation. Usually it goes up each year.
Umm, I mean you don't need to do any reporting. If you give away
more than that, remember to track it how much it was.
And file a gift tax return at the end of the year. You still
don't have to pay gift. Tax it is even though it's a gift tax
return. You don't have to pay any tax on that unless it's over $13
million in your lifetime. Though,
doesn't- doesn't apply to a lot of people but in some unique scenarios it
definitely can apply. So that is it for today.
