Can You Use Gift Funds for an Investment Property?

Using gift funds for a real estate purchase is common, particularly for a primary residence. When acquiring an investment property, however, specific considerations and stricter rules often come into play. Lenders and tax authorities view these transactions differently, necessitating a clear understanding of eligibility, requirements, and financial implications.

Defining Gift Funds

Gift funds represent money provided to an individual with no expectation of repayment. This distinction from a loan is fundamental in real estate transactions, as lenders scrutinize the source of down payment funds. The donor must be an eligible individual as defined by the lender.

Eligible donors commonly include immediate family members, such as parents, grandparents, siblings, or spouses. Some lenders may extend this to include other close relatives, fiances, or domestic partners. The funds must originate from the donor’s own verifiable assets, and not from borrowed money or any source that would create a new debt obligation for the donor. This ensures the gift is legitimate and does not introduce hidden liabilities for the borrower.

Lender Rules for Investment Property Purchases

Mortgage lenders approach the use of gift funds for investment properties with more caution compared to primary residences. While historically often not permitted, some guidelines have evolved, and it may now be possible under specific conditions. Rules can vary significantly among lenders and loan types.

A common requirement is that the borrower must contribute a portion of the down payment from their own verifiable funds. For instance, a lender might require at least 5% of the total down payment from personal savings, even if gift funds are permitted. This differs from primary residence purchases where the entire down payment can sometimes be gifted. Investment properties typically require a larger down payment, often ranging from 15% to 25%.

Lenders also consider whether gift funds are “seasoned.” Seasoned funds have been in the borrower’s bank account for a certain period, typically 60 to 90 days, prior to the loan application. Funds that have not been seasoned may require additional documentation to verify their origin and ensure they are not a hidden loan. While gift funds generally do not have seasoning requirements if properly documented, any large, recent deposit might raise questions.

Specific loan programs and individual lender policies dictate gift fund allowances. Government-backed loans, such as FHA or VA loans, have distinct rules, often more flexible for primary residences but with strict limitations for investment properties. For conventional loans, using gift funds for an investment property’s down payment can be highly restrictive, often not allowed for real estate intended solely for income.

Tax Implications for Givers and Receivers

Federal law primarily places the burden of gift tax on the donor, not the recipient. Generally, recipients are not required to report gift funds as taxable income, regardless of the amount received.

For the giver, an annual gift tax exclusion applies. In 2024, an individual can gift up to $18,000 per recipient without filing a gift tax return (Form 709) or impacting their lifetime gift tax exemption. A married couple can effectively double this amount, gifting up to $36,000 to each recipient. Gifts exceeding this annual exclusion amount require the donor to file IRS Form 709.

Filing Form 709 does not automatically mean gift tax is owed. Instead, amounts exceeding the annual exclusion reduce the donor’s lifetime gift tax exemption. For 2024, the federal lifetime gift and estate tax exemption is $13.61 million per individual. Federal gift tax typically becomes due only if a donor’s cumulative lifetime gifts surpass this exemption. Some states may have their own gift or inheritance tax rules, though this is not common.

Required Documentation for Gift Funds

Lenders require specific documentation to verify the legitimacy of gift funds. The primary document is a gift letter, a formal statement signed by the donor and sometimes the recipient. This letter confirms the funds are a gift, not a loan, with no expectation of repayment.

The gift letter must include:
The donor’s full name, address, telephone number, and relationship to the recipient.
The exact dollar amount of the gift.
A clear statement that no repayment is expected.
The property address for which the gift is intended, if known.
The date of the letter and signatures from both the donor and recipient.

Lenders also require proof of fund transfer, typically bank statements from both the donor and recipient. The donor’s statements should show sufficient funds prior to transfer and the withdrawal of the gifted amount. The recipient’s statements must show the deposit into their account. Maintaining a clear, traceable paper trail is essential for verification. For very large gifts or recently deposited donor funds, lenders might request additional documentation from the donor, such as pay stubs or tax returns, to verify the source.