No investment is a sure thing, but real estate tends to come pretty close; which is why property is a pretty attractive asset to add to your investment portfolio, especially if you’ve got help funding your acquisition.

Using gifted funds can be a fantastic way to secure access to real estate investments without having to stress about sourcing most of the purchase through more traditional financing. 

That being said, there are some rules and tax obligations around using gifted cash to buy investment properties that you should be aware of.

That’s why we’ve created this guide.

I’ll explain when you’re allowed to use gift funds for investment properties, detail potential issues with using gifted funds for investment properties, and breakdown of all the documentation you’ll need to file and keep if you plan on going this route.

Key Takeaways

• You can normally only use gift funds for an investment property if you’re financing the purchase without a conventional loan.

  
  

• Most lenders won’t allow you to use gift funds alongside a mortgage agreement to finance an investment property.

  
  

• Cash donors are liable to pay the IRS gift tax on any amount over $17,000 per person, per year.

Are You Allowed to Use Gift Funds to Buy an Investment Property?

Yes, you can use gift funds to buy an investment property; however, whether you’re allowed to use them depends on whether you’re planning to pursue a conventional bank loan.

“While using gift money or gift equity to purchase investment properties is not specifically prohibited by law, it's vital to be aware that lenders and mortgage programs may have restrictions and guidelines,” explains David Tully, a real estate expert in Reno, Nevada.

“Lenders frequently place restrictions on the amount of the property's purchase price that can be paid for by gifts and frequently demand a clear documentation trail to prove the source of gift cash,” he continues.

To be clear: there aren’t any laws against using both gift money and a conventional loan to buy an investment property, lenders just don’t like to do it. This stems from guidelines set up by the US Government-backed Freddie Mac and Fannie Mae. 

Most banks will allow you to use gift funds alongside a mortgage loan if you’re planning to stay in the property as a primary or secondary residence. But if you’re not going to live there, banks will typically demand proof that all the cash going towards a mortgage down payment is your own personal money.

For reference, if you’ve had gifted funds in your bank account for more than 90 days, it might be considered your own funds, but that’ll come down to the individual lender’s policy.

“Following these lender-specific guidelines is essential to guarantee a smooth transaction and loan approval procedure,” Tully says.

The best way to stay on top of these rules and to make the best decision for your financial future is to speak to your lender and seek out advice from real estate experts.

When is it a Bad Idea to Use Gift Funds to Help You Buy an Investment Property? 

The single greatest issue you’ll likely face when using gift funds for an investment property will be trying to bridge any funding gaps between the amount you’ve been gifted and the price tag of your investment property. 

David Tully also points out that you’ve got to ensure you’ve got a firm grasp on your own personal finances before taking on an investment property, even if you’ve got extra padding to rely on from gifted funds.

“While receiving gift money can help with the early costs of buying an investment property, it's crucial to think about any potential risks of low savings. To be well-prepared for any unforeseen circumstances that may emerge in your real estate pursuits, it's critical to strike a balance between using gift cash and keeping your own financial safety net,” Tully explains.

Another potential issue that could arise when using gifted funds to buy an investment property is a disagreement with the person who gifted you the funds. In situations where the cash has been gifted to you by someone who’s still alive, you have to be wary of any potential ownership disputes later down the road.

“Establishing a transparent agreement detailing the purpose of the gift funds, any conditions, and how they relate to ownership can help prevent any future disagreements and provide a smooth path for your investment journey,” explains real estate broker Nicholas McMillan, owner of Hire Realty LLC.

He also recommends that you “work with legal professionals to formalize these arrangements and safeguard your investment.”

What Sort of Documentation is Required When You're Using Gift Funds to Finance a Property Purchase? 

Whenever you’re financing a property with the help of gift funds, ironclad documentation is absolutely essential. 

By ensuring you’ve got all the correct documents securely filed away, you’ll be able to rest easy knowing that all parties can meet any relevant tax obligations, provide proof of ownership, or secure additional funding if it’s compatible with gift funds.

Generally speaking, when accepting gift funds to use towards a property purchase, you’ll need the following documents:

• Proof of Funds: The gift donor (the person providing the funds) may need to provide proof of the source of the gift funds. This could include bank statements showing the funds available in the donor's account.

  
  

• Gift Letter: This is a formal statement from the gift donor that confirms the amount of the gift, their relationship to the borrower, and a statement that the funds are a gift and not a loan. The letter should also include the property address, the purpose of the gift, and both the donor's and recipient's contact information.

  
  

• Relationship Verification: Lenders may require documentation to verify the relationship between the donor and the borrower. This could include birth certificates, marriage certificates, or other relevant documents.

  
  

• Gift Transfer Documentation: Documentation showing the transfer of funds from the donor's account to the borrower's account will normally be required. This could include copies of checks, wire transfer records, or other evidence of the transaction.

  
  

• Donor's Identification: The donor may need to provide a copy of their government-issued identification to verify their identity.

  
  

• Borrower's Acceptance: The borrower may need to provide a written statement confirming their acceptance of the gift funds.

That’s a lot of documentation to track down and keep track of, which is why you need a dynamic digital solution that enables you to stay up-to-date with all the right paperwork and ensure it’s accessible by the right parties.

That’s where a Family Operating System® like Trustworthy comes to the rescue.

With Trustworthy, you can upload and create digital copies of all your financial information, identification, correspondence with fund donors (like gift letters), relationship verification documents like birth certificates or marriage certificates, and everything in between.

Best of all, you can then share those essential documents with your financial planner or with the person who gifted you your investment funds to ensure that you’re both abiding by all the necessary IRS regulations at all times.

Are you ready to get organized? Explore the benefits of Trustworthy now.

What are the Tax Obligations Involved With Using Gifted Funds to Buy a Property?

When you accept gift funds from a donor to buy an investment property, there are a couple of key tax issues to be aware of.

The first issue is going to be the IRS Gift Tax. 

If someone gives you a big monetary gift, the IRS is prone to tax that gift. Donors are allowed an annual gift tax exclusion of $17,000 per person, per year. This means anything above $17,000 will get taxed at the relevant rate, and it’s the donor’s responsibility to pay that tax (not the person receiving the gift).

In terms of the tax obligations of receiving gift funds, property investors will need to focus their attention on future capital gains.

“The specific tax implication of using gifted funds to buy a property is that if the property's value appreciates and you decide to sell it, you might be subject to capital gains tax on the difference between the property's original cost basis (usually the amount the donor paid for it) and its selling price,” says David Tully.

It’s important to consider this potential tax liability if you plan on using gifted funds to buy an investment property.

Frequently Asked Questions

Can You Use Gift Funds on Investment Properties?

Yes, but only if you’re financing the purchase without a conventional loan. Most lenders won’t let you use gift funds as a mortgage down payment for an investment property.

Do You Have to Declare Gifted Money for Mortgage?

Yes, most lenders will require you to provide proof of funds if you’re using gift funds to finance a part of your property purchase.

Is There a Limit on Gift Funds?

There’s no limit on the amount of funds a donor can give to you, but it becomes taxable after it exceeds the donor’s annual gift tax exclusion amount. In 2023, that amount is $17,000.