Can Earnest Money Be Gifted? Requirements & Tax Implications
Gifting earnest money for a home? Learn the key requirements and tax implications for your property transaction.
Earnest money demonstrates a homebuyer’s commitment in a real estate transaction. It is a deposit made to the seller, signaling serious intent to purchase the property. This amount, typically held in an escrow account, helps secure the property and is later applied towards the buyer’s down payment and closing costs at settlement. This initial deposit provides the buyer time to arrange financing, conduct inspections, and complete other necessary steps before finalizing the purchase.
Understanding Gifted Earnest Money
Earnest money can be gifted to a homebuyer, providing financial assistance for their home purchase. This often occurs when family members or close friends contribute funds to help a buyer enter the housing market. While permissible, lenders and sellers carefully review the source of these gifted funds.
Lenders scrutinize gifted funds to ensure the buyer’s financial stability and to prevent potential fraud. They confirm the money is a genuine gift with no expectation of repayment, rather than an undisclosed loan that could impact the buyer’s debt-to-income ratio. Transparency regarding the origin of these funds is important to maintain the transaction’s integrity.
Documentation for Gifted Funds
When earnest money is gifted, documentation is required to satisfy lender requirements and verify the funds’ legitimacy. A gift letter formally confirms the financial contribution. This letter must include the full names of both the donor and the recipient, clearly state their relationship, and specify the exact dollar amount of the gift.
The gift letter must also state that no repayment is expected. It should list the property’s address and include the donor’s contact information and signatures from all involved parties. This ensures the lender understands the gift’s terms and that it does not represent an additional financial obligation for the borrower.
Lenders also require bank statements from both the donor and the recipient to trace the funds’ movement. Thirty to 60 days of bank statements are requested from the donor to prove funds availability prior to the gift. The recipient’s bank statements confirm receipt of the gifted amount. If the donor recently received a large sum of money, lenders may require further documentation to prove the original source of those funds.
Tax Considerations for Gifted Earnest Money
Gifting earnest money involves tax considerations for both the donor and the recipient. For 2025, the annual gift tax exclusion allows an individual to give up to $19,000 to any number of recipients without triggering a tax obligation or requiring the gift to be reported to the Internal Revenue Service (IRS). If a married couple jointly gifts funds, they can collectively give up to $38,000 per recipient under this exclusion for 2025.
If a gift exceeds the annual exclusion amount, the donor is responsible for reporting it to the IRS by filing Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return. This reporting does not automatically mean that gift taxes are owed; instead, the excess amount reduces the donor’s lifetime gift tax exemption. For 2025, the lifetime gift and estate tax exemption is $13.99 million per individual, meaning most gifts will not result in an immediate tax payment.
The recipient of gifted earnest money does not incur income tax liability on the funds received. Gifts are not considered taxable income to the recipient. However, it is always advisable for both donors and recipients to consult with a qualified tax professional to understand the specific implications of their unique financial situation.