Q: My brother is providing me with $40,000 down payment to purchase a primary residence.
The amount is intended to be a gift. Would he need to pay taxes on the amount over $15,000 or could this be claimed under the lifetime exemption? If it’s taxable, would agreeing to repay the amount upon sale of the property turn it from a gift to a loan?
A: Currently you can gift up to $15,000 per person per year, without filing a federal gift tax return. Therefore, your proposed gift of $40,000 from your brother would be over this amount. He could gift you $15,000 this year and $15,000 in 2021 without filing a gift tax return, or if he is married, he and his wife could each gift you $15,000 this year, and an additional $10,000 in 2021 without filing a federal gift tax return. If you need all of the money before the end of the year, he can gift you above $15,000, and as you mentioned, he could file a federal gift tax return claiming the extra $25,000 as part of his lifetime exemption. This would reduce the total amount he can leave tax free to heirs at death and during life by this $25,000 amount. As far as a loan, yes if your brother loans you the money instead of gifting it, it is not a gift, and you would not need to file a gift tax return. If you structure it as a loan I suggest having a written promissory note in place and you must charge interest at or equal the applicable federal rate in order to avoid imputed interest by the IRS. I suggest working with an attorney to structure this properly. Best of luck to you both!
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