Attorney Thomas B. Burton answers the following question: "Can Brother Give Me $40K for House Without Paying Gift Tax?"
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Welcome back, I'm Attorney Thomas Burton. I'm an estate planning and asset protection attorney here in Wisconsin and today's question has to do with Real Estate Law and the reader asked the following -
"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?"
So good question and I'm glad you're aware of the lifetime annual exclusion amount or the lifetime exemption amount as well as the annual exclusion amount. So your $15,000 is the current amount that anyone can give away tax free to any one person per year. So you can write a check for $15,000 in 2021 to any individual without owing any gift tax and this is called the annual exclusion amount. So this proposed gift of $40,000 would be over that $15,000 limit. So $40,000 minus $15,000 would be $25,000 over the limit. What your brother would need to do is file a gift tax return and claim the additional $25,000 as a gift, to you during his life and he would have to deduct that amount from the annual lifetime, the lifetime gift tax exclusion which is currently over 11 million dollars per person, okay? So that 11 million dollars is the amount, the total amount you can give away during your whole life and after death. So you would have to deduct the $25,000 from this amount and file that with the IRS.
So a lot of people don't want to do that, don't want to file a gift tax return, so they'll just keep the gift under that $15,000 per person per year.
Now if you're near the end of a tax year, you can give $15,000 in one year in December and $15,000 in another year, in January and that would work as well but it's not a huge deal to file this gift tax return. You just have to actually do it. Now I don't know how much money your brother has, I'm saying it's not a huge deal if he isn't close to that 11 million dollar lifetime exemption but if he does have a lot of assets and he wants to leave money to his children at death and things like that, then he might not want to use up some of his lifetime exemption because under current law in 2025, that 11 million dollars is scheduled to go back to the pre 2008 levels which is around more like 3.5 million dollars. So if he files the gift tax return, this would reduce the amount, he can leave tax fee to heirs at death and during life by $25,000.
Now as files alone, if your brother loans you the money instead of gifting it, it is not a gift and he would not need to file a gift tax return. However, if you structure it as a loan, I suggest you have a written promissory note in place and you must charge interest equal to the applicable federal rate based on the length of the loan. So you have to charge a minimum amount of interest otherwise the IRS will do what they call Imputed Interest on the loan and it depends how long the loan is but you can find that applicable federal rate by Googling it. It's based on current interest rates and long-term treasury rates and things like that. So it depends if it's you know, a short-term loan, a couple years or three to five, five to seven, ten or more and then you get that applicable federal rate that you would need to put in the promissory note. So if you're going to do a loan, I suggest you work with an attorney to make sure you get it structured properly, just so that you avoid running into that imputed tax interest for your brother with the IRS but the other option would be to do it as a gift, keep it under the $15,000 in each year and that would get you close to your $40,000, if you could do it in two tax years, you could get $30,000.
The other option, I don't know, if you are married but the limit is per person per year. So if you had a spouse and this was for a down payment, your brother could gift an amount to your spouse to use towards the down payment but you have to be careful there, only you know your marriage situation and if it's likely to last and things like that because a gift made to the spouse would be that spouse's property but I know some clients do this when they want to give more than $15,000 in a year. If they're giving it to a child and the child has been married a long time and they aren't concerned about the marriage breaking apart.
So good question thinking about this issue before having your brother gift you the money and he certainly can gift you that sum, it's very generous, just make sure, if you gift the $40,000 all in one year, that you file that gift tax return, that your brother files that gift tax return to properly deduct the amount from his lifetime exclusion amount.
So thank you for asking the question. I hope this was helpful to you and for my other viewers watching. I hope this was helpful to you as well and the reason I answer these questions pro bono. on my YouTube channel. is to help others in a similar situation and to help them increase their understanding in these areas. If they're going through a similar situation and take charge of their own estate planning. So if you found this video useful, please consider giving it a LIKE on YouTube, so that the YouTube algorithm shows it to more people and it helps others as well.
Thanks for watching and we'll see you next time.
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