Gift Money for Down Payment 2026: IRS Rules, Gift Letter Template & Tax Implications
Parents giving you $20K for down payment? Perfect! But you need a gift letter, proper documentation, and to understand IRS rules. Here's the complete guide to accepting gift money without tax issues.
⚡ Quick Answer: Can You Use Gift Money?
YES! All major loan types allow gift money for down payment. Parents, grandparents, siblings can gift any amount. You need: 1) Gift letter, 2) Paper trail (bank statements), 3) No repayment expected.
Recipient NEVER pays taxes on gifts. Donor may owe gift tax if exceeding $18K/person/year, but most use lifetime exemption ($13.61M).
🎯 Get Pre-Approved Using Gift Money
Tell lenders upfront you're using gift funds. They'll guide you through documentation and gift letter requirements:
| Loan Type | Gift Allowed? | Max Gift % | Who Can Gift? |
|---|---|---|---|
| Conventional (20%+ down) | Yes | 100% | Family, friends, employers |
| Conventional (5-19% down) | Yes | 95% | Family only (5% must be your funds) |
| FHA | Yes | 100% | Family only |
| VA | Yes | 100% | Family only |
| USDA | Yes | 100% | Family only |
What Is Gift Money for Down Payment?
Gift money is money given to you by a family member (or friend, in some cases) to help with your down payment and closing costs. The key requirement: it must be a true gift with no expectation of repayment.
📐 The Rule:
Gift = No repayment expected (ever)
Loan = Must be repaid (counts toward DTI)
Lenders verify this with a signed gift letter stating money is a gift, not a loan.
Gift Letter Template (Copy & Use)
Here's a complete gift letter template that meets all lender requirements:
GIFT LETTER
Date: [Current Date]
To Whom It May Concern:
I/We, [Donor Name(s)], hereby certify the following:
- I/We have made a gift of $[Amount] to [Recipient Name], my/our [Relationship] (e.g., son, daughter, etc.).
- This gift is to be applied toward the purchase of property located at: [Property Address]
- This is a bona fide GIFT and there is no obligation, expressed or implied, for repayment.
- No lien or other encumbrance is attached to this gift.
- The source of these gift funds is: [Source, e.g., "personal savings account"]
Donor Information:
Name: [Donor Full Name]
Address: [Donor Address]
Phone: [Donor Phone]
Relationship to Recipient: [Relationship]
Donor Signature: ________________________
Date: ________________________
Note: Both donor and recipient should sign. Lender may require notarization.
💡 PRO TIP: Have donor sign gift letter BEFORE transferring money. Lender needs this as part of your mortgage application. Some lenders provide their own gift letter template - ask your loan officer first.
How to Document Gift Money (Step-by-Step)
Lenders require a complete paper trail to verify gift funds are legitimate and not borrowed money.
Required Documentation
- Signed Gift Letter
Use template above. Both donor and recipient sign. Date it.
- Donor's Bank Statement
Shows donor had funds available. Must show withdrawal matching gift amount.
- Transfer Documentation
Wire transfer receipt, cashier's check copy, or canceled check showing transfer.
- Your Bank Statement
Shows deposit of gift funds. Must match amount in gift letter.
- 60-Day Seasoning (Optional)
If gift deposited 60+ days before application, lender may not need full paper trail. But safer to provide anyway.
Real Example: Complete Documentation
Scenario: Parents gift $30,000 for down payment
Step 1: Gift Letter (March 1)
- Parents sign gift letter stating $30,000 gift
- No repayment expected
- For property at 123 Main St
Step 2: Transfer (March 5)
- Parents wire $30,000 from their savings
- Wire receipt shows: From John & Mary Smith to Sarah Smith
- Amount: $30,000
Step 3: Documentation for Lender
- ✅ Signed gift letter
- ✅ Parents' bank statement showing $30K withdrawal
- ✅ Wire transfer receipt
- ✅ Sarah's bank statement showing $30K deposit
- ✅ All statements show matching dates and amounts
🎯 Get Pre-Approved with Gift Funds
Tell your lender upfront about gift money. They'll guide you through documentation and make the process smooth:
Get Pre-Approved (Gift Funds Welcome)IRS Rules & Tax Implications
Understanding gift tax rules is crucial. Good news: recipients NEVER pay taxes on gifts.
2024 Gift Tax Rules
| Scenario | Annual Exclusion | Tax Implications |
|---|---|---|
| Single donor to single recipient | $18,000/year | No tax, no filing required |
| Married couple to single recipient | $36,000/year | No tax, no filing required |
| Gift exceeds annual exclusion | Any amount | File Form 709, use lifetime exemption ($13.61M) |
Real Tax Examples
✅ Example 1: No Tax
- • Parents gift $30,000
- • Dad gifts $15,000
- • Mom gifts $15,000
- • Both under $18K limit
Result: No tax, no Form 709 required
⚠️ Example 2: Form 709 Required
- • Parent gifts $50,000
- • Exceeds $18K by $32K
- • Must file Form 709
- • Uses $32K of lifetime exemption
Result: No tax owed, but must file Form 709
📐 KEY POINT: Lifetime gift tax exemption is $13.61 million (2024). Most people never pay gift tax - they just file Form 709 to track gifts against lifetime exemption. Consult a tax advisor for gifts over $18K/person.
Who Can Give Gift Money?
Acceptable Donors by Loan Type
✅ Family Members (All Loans)
- • Parents
- • Grandparents
- • Siblings
- • Children
- • Spouse/Fiancé(e)
- • Domestic partner
- • Aunt/Uncle
- • Niece/Nephew
- • Cousin (some lenders)
⚠️ Non-Family (Conventional Only)
- • Friends (if 20%+ down)
- • Employers (with restrictions)
- • Charitable organizations
- • Government agencies
- • Religious organizations
Note: FHA, VA, USDA only allow family gifts
Common Gift Money Mistakes to Avoid
❌ Mistake 1: No Gift Letter
Transferring money without a signed gift letter = lender may reject funds or delay closing. Always get gift letter BEFORE transfer.
❌ Mistake 2: Cash Gifts
Never accept cash. Lenders can't verify source. Use wire transfer, check, or cashier's check with full paper trail.
❌ Mistake 3: Depositing Too Late
Depositing gift 1 week before closing = documentation nightmare. Deposit gift funds 60+ days before applying, or provide complete paper trail.
❌ Mistake 4: Calling It a "Loan"
If there's ANY expectation of repayment, it's a loan (not a gift). Loans count toward your DTI and may disqualify you. Must be true gift with no repayment.
❌ Mistake 5: Incomplete Documentation
Missing donor's bank statement or transfer receipt = lender can't verify source. Provide ALL documentation: gift letter, donor statement, transfer proof, your statement.
🎯 Ready to Use Gift Money for Your Home?
Get pre-approved and tell your lender about gift funds upfront. They'll guide you through the gift letter and documentation process:
Frequently Asked Questions
Can I use gift money for closing costs too?
Yes! Gift money can cover down payment AND closing costs. Just specify total amount in gift letter. Example: "Gift of $40,000 for down payment and closing costs." Lender will verify you have enough for both.
What if donor doesn't have $30K in one account?
Donor can combine funds from multiple accounts. Provide bank statements for ALL accounts showing total funds available. Example: $15K from savings + $15K from checking = $30K gift. Document both withdrawals.
Can I pay back the gift after closing?
Technically no. Gift letter states no repayment expected. If you repay, it was actually a loan (mortgage fraud). However, after closing, what you do with your money is your business. But don't document repayment or tell lender about plans to repay.
What if gift comes from overseas?
International gifts require extra documentation: foreign bank statements (translated to English), wire transfer receipts, explanation of relationship, and possibly proof of donor's income source. Allow 60-90 days for lender to verify international funds.
Can I use gift money for investment property?
No. Gift money is only allowed for primary residence or second home. Investment properties require your own funds (20-25% down). Lenders verify property will be owner-occupied, not rented out.
Meet Sarah
Senior Mortgage Advisor & VA Loan Specialist
Sarah Mitchell brings over 12 years of mortgage industry expertise, specializing in VA loans and first-time homebuyer programs. As a certified NMLS professional, she has helped thousands of veterans and military families achieve homeownership through specialized loan programs. Her deep understanding of VA benefits and down payment assistance programs makes her a trusted advisor for service members transitioning to civilian life.
EXPERTISE:
KEY ACHIEVEMENT:
Helped 2,500+ veterans secure home loans