Are Gift Funds Allowed on Investment Property?

The use of gift funds to acquire an investment property has become more feasible. While traditional guidelines for conventional loans historically imposed restrictions on using gifted money for such purchases, recent adjustments have introduced new possibilities. Understanding the specific conditions under which these funds can be utilized is important for navigating the current real estate landscape. This includes knowing who can provide gifts, the necessary documentation, potential tax considerations, and varying lender requirements.

Eligibility and Source of Gift Funds for Investment Properties

Gift funds, when used for real estate, must originate from an acceptable donor and be a true gift without any expectation of repayment. Acceptable donors typically include relatives by blood, marriage, legal guardianship, or adoption, as well as fiancés and domestic partners. The funds must come directly from the donor’s own verifiable bank account, ensuring they are not borrowed money or from any party with a vested interest in the transaction, such as a seller or real estate agent. This direct transfer helps maintain transparency and prevent conflicts of interest.

Historically, conventional loans backed by Fannie Mae and Freddie Mac generally prohibited the use of gift funds for investment property purchases. This meant that buyers typically needed to source the entire down payment from their own funds. However, recent guideline updates from Fannie Mae now allow gift funds to be used for investment property down payments. This change expands options for investors seeking financial assistance.

The core principle remains that the funds must be a genuine gift, meaning there is no implied or explicit agreement for repayment. Lenders require clear confirmation that the gifted money is not a disguised loan, which could impact the borrower’s debt-to-income ratio. This “true gift” nature is a consistent requirement across most lending programs.

Required Documentation for Lenders

When using gift funds for an investment property, lenders require specific documentation to verify the legitimacy and source of the money. A gift letter is a mandatory document that formalizes the transaction. This letter must include the donor’s and borrower’s names, the exact amount of the gift, a clear statement that no repayment is expected, the property address, and the donor’s signature. It serves as legal proof that the funds are a gift and not a loan.

Lenders also require bank statements from both the donor and the borrower to establish a clear paper trail. The donor’s bank statements typically need to show proof that the funds were available in their account prior to the gift for 30 to 60 days. This verifies the source and ensures the donor did not obtain a loan. The borrower’s bank statements will then show the receipt of the gifted funds.

The timing of the funds transfer is also important. If the gifted funds have been in the borrower’s account for 60 days or more, they may be considered “seasoned” and treated as the borrower’s own funds. If funds are deposited closer to the loan application, a more detailed paper trail, including copies of checks, wire transfer records, or deposit slips, will be necessary.

Tax Implications of Gift Funds

Using gift funds for an investment property involves specific tax considerations for both the donor and the recipient under federal law. The Internal Revenue Service (IRS) imposes a federal gift tax on transfers of money or property for which the giver receives nothing in return. However, there is an annual gift tax exclusion that allows individuals to give a certain amount to any one person. For 2025, this annual exclusion is $19,000 per recipient.

If a gift exceeds this annual exclusion amount, the donor is typically responsible for reporting it to the IRS by filing Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. Exceeding the annual exclusion does not automatically mean gift tax is owed; instead, the excess amount counts against the donor’s lifetime gift tax exemption. For 2025, the lifetime gift tax exemption is $13.99 million per individual.

For the recipient, gift funds are generally not considered taxable income, regardless of the amount. While some states may have their own inheritance or gift tax rules, these are less common. Consulting a tax professional is advisable for state-specific implications.

Common Lender Requirements and Limitations

Even with the updated guidelines allowing gift funds for investment properties with conventional loans, lenders often impose additional requirements and limitations. One common practice is requiring a minimum contribution from the borrower’s own funds for investment property down payments. This might mean that while gift funds can cover a portion, a certain percentage of the down payment, such as 5% or 20%, must come directly from the borrower’s personal savings. This borrower contribution helps to demonstrate the borrower’s financial stake.

Individual lenders can also implement “overlays,” which are stricter requirements than the general guidelines set by entities like Fannie Mae. A lender might have internal policies that limit the percentage of the down payment that can come from gifted funds for investment properties, even if the general guidelines permit it. Borrowers should confirm specific gift fund policies with their chosen lender early.

While conventional loans now offer more flexibility, other loan programs, such as non-qualified mortgage (non-QM) loans like Debt Service Coverage Ratio (DSCR) loans, may be more accommodating of gift funds for investment properties. These programs cater to different borrower profiles and property types. Additionally, lenders may have specific rules regarding whether gift funds can count towards required cash reserves for investment properties. Some programs allow eligible gift funds to satisfy reserve requirements, while others only accept funds that originate directly from the borrower’s own seasoned accounts.