There is an IRS related requirement that needs to be addressed when making larger gifts to children, whether it be the down payment or full purchase price of the home. During your life and at your death, the current tax code allows you to gift approximately $13.6M tax free in aggregate (as of 2024). This is a tax exemption that has historically increased over time. The tax-free gifting exemption can be doubled for spouses to over $27M for 2024. For the vast majority of people, these are levels that are not important as they can fit their net worth easily under these thresholds. But even if you are well below these levels, the IRS still makes it a requirement to track taxable gifts made during your lifetime and at death so that if you were to breach the threshold in aggregate, they can tax you or your estate at an approximately 40% tax rate on any amount above these levels. Thus, when you make a gift during life above a certain amount (more on this below), the IRS requires you file a
gift tax return essentially “bookmarking” the gift made for a particular year. Below is the top portion of the first page of Form 709 where you would document a gift to the IRS.
If this gift, combined with previously documented gifts to the IRS, are below the large exemption amounts referenced above, no tax is due and the amount gifted reduces this overall lifetime exemption amount, which currently adjusts every year with inflation.
In conjunction with these lifetime exemption amounts, each year a donor can gift up to $18,000 (as of 2024), or $36,000 for spouses, per person without having to file a gift tax return. This amount is excluded from being considered a gift that is reportable to the IRS on the 709 return. The per person allowance is important because this $36,000 amount could be doubled to $72,000 for 2024, if the gift is being made by mom and dad to a son and their daughter-in-law, for example, without having to file a gift tax return. Continuing with this example, if the down payment required is $200,000, and mom and dad gift the entire amount to son and daughter-in-law in 2024, they would have to file a gift tax return for 2024 showing the difference between the entire gift made and annual exclusion amount ($200,000 minus $72,000). Thus, $128,000 would be reported as a gift ($64,000 to son and $64,000 to daughter-in-law) in 2024 and subtracted from the estimated $27M currently exempted from gift and estate tax.
Again, no tax would be due unless the parent had used up all of their lifetime exemption. But the IRS does track these transactions, and if the parent ended up filing multiple 709 tax returns during their lifetimes, the 2024 gift tax return would summarize all of the taxable gifts made and how much available exemption they had remaining to make gifts during the rest of their lives and at their deaths. Thus, if a parent has the means to gift the entire purchase, this would only increase the amount documented on the gift tax return, less the annual exclusion amount that can be utilized.