If we forgive a family loan, do we avoid gift tax?May 4, 2012: 5:05 AM ET
Can we lend our daughter down payment money and then forgive the loan over time to avoid the gift tax?
—V.A., Andover, Mass.
That's probably not an option. Any bank lending your daughter money for a home wouldn't want her to borrow on top of the mortgage she's already taking out; the bank would likely make you sign a letter stating that the funds are a gift that will not be paid back, says St. Louis CPA Howard Rosen.
Your loan-forgiveness idea may not even be necessary. You and your spouse can jointly give your daughter up to $26,000 each year and not have to worry about the gift tax at all. If the down payment for her home is higher than that, you can use up part of your lifetime exclusion—currently $5 million per person—to avoid taxes on your gift, says Bellmore, N.Y., CPA Jeff Sklar. All you have to do is file a gift-tax return.
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