Your parents providing money for your house down payment may help you buy a bigger house and reduce your debt burden. However, this generous act may trigger taxes. You usually don't have to pay any income tax on the gift, but depending on the size of the gift, your parents may have to pay a gift tax.
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Any money you receive as a gift does not count toward your income for tax purposes. The Internal Revenue Service considers the down payment money as a gift if your parents don't expect you to repay the funds. However, if you receive any income from the property in the future, you will have to pay income tax on it. For example, if you rent out the property, you have to pay taxes on the rent income.
Generally, the person donating the money has to pay the gift tax if the sum exceeds a certain amount. However, you can offer to pay the gift tax for your parents. The IRS determines the maximum amount of gift that doesn't trigger the gift tax. As of 2011, the maximum amount of annual nontaxable gift tax is £8,450 per person per donee. This means that a person can give up to £8,450 to any one other person in one year.
If both your parents are giving you the money for the down payment, they can split the gift to minimise the taxable amount. With gift splitting, your parents can each give you the maximum nontaxable amount. As of 2011, this means that they can give you up to £16,900 without having to pay any gift tax. To do this, your parents have to both agree to the arrangement and each use the annual exclusion for half the total amount.
Filing Gift Tax Return
Your parents have to file a gift tax return if the gift amount is higher than the annual gift exclusion. If your parents decide to split the gift, they have to file the tax return regardless of the gift amount, but this may not trigger any gift tax. You and your parents should consult an attorney and an accountant before transferring the gift money. If the gift is a part of your parents' overall estate plan, you may also have to consult an estate planning attorney.
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