Paying Taxes on Family Down Payment and Refinancing Gifts

Sometimes, a little help from a family member can make a huge difference in your monthly budget. Using a gift from a loved one can help you get the down payment you need to refinance into a conventional, fixed-rate mortgage. In today's real estate market, a family gift can even mean regaining traction on an underwater home loan.

New Gift Splitting Guidelines Enhance Refinancing Deals
As of January 1, 2009, Internal Revenue Service guidelines allow individuals to give up to $13,000 to a single recipient during a calendar year without incurring a tax penalty. Married couples frequently double up their gifts to children and loved ones, since matching individual gifts from jointly held checking accounts count as separate gifts for the purpose of calculating annual tax liabilities. Therefore, under 2009 tax regulations, your parents can give you as much as $26,000 without affecting their taxes.

If you're married, the annual exclusion under this "gift splitting" strategy rises to $52,000 when each of your parents makes separate gifts to you and to your spouse. And, if you enjoy significant wealth within your extended family, your spouse's parents can provide matching gifts for a potential grand total of $104,000. Beyond that amount, your parents (and your spouse's parents) become liable for gift taxes on any amounts above the annual exclusion limit. For instance, if your parents give you $30,000 toward your refinancing deal, $4,000 of that gift is subject to tax. However, a tax attorney can help your parents track their lifetime "unified credit," a figure that the IRS uses to further limit the amount of tax on unrestricted gifts.

Refinancing with Help From Family Credit Lines
Unfortunately, few Americans have parents that can afford to worry about hitting the annual exclusion limit on tax-free gifts. In many cases, refinancing with the help of a family member involves using their own credit to help raise funds for your down payment. Some refinance strategies may even require relatives to take partial ownership in your home. Personal finance advisers caution families about overextending their collective credit, especially if a home loan's monthly payment stretches the primary resident's budget too tight.

Adding a parent or another relative to your mortgage isn't as easy as appending their name to the bill. Some homeowners choose to place property into a living trust with relatives, assuring that possession remains stable even after the passing of a partial owner. Other refinance deals require you to sell your home back to yourself and to your parents, putting you at risk of being taxed on any property value increase since your original purchase. Consult a qualified tax attorney before you shop rates online to get the best advice for your unique situation.

About the Author:
Joe Taylor Jr. is an internal business consultant for a Fortune 500 company, who writes about finance, culture, and design. He holds a Bachelor of Science in Communications from Ithaca College.