What is a gift letter?
A gift letter is a short, written statement from a donor that documents money transferred to a recipient as a gift — i.e., money that is not expected to be repaid. Gift letters are most commonly requested by mortgage lenders when a borrower uses funds given by a friend or family member toward a home purchase (for example, as a down payment). The purpose is to show the lender the funds are not an additional liability (a loan) that could affect the borrower’s ability to repay the mortgage.
Key takeaways
– A gift letter documents that transferred funds are a gift, not a loan, and is usually signed by the donor (and sometimes the recipient).
– Lenders require gift letters so they can exclude gifted funds from the borrower’s debt obligations when qualifying them for a mortgage.
– The IRS doesn’t require that the gift letter itself be filed, but gifts above the annual exclusion must generally be reported by the donor on IRS Form 709 (gift/estate tax return).
– Gift letters are strong evidence of the donor’s intention not to be repaid; lenders rely on them, and they are typically legally binding as to the donor’s stated intent.
– Always preserve supporting documentation (bank statements, wire transfers, cancelled checks) in addition to the signed letter.
How gift letters work (basic mechanics)
1. Donor gives funds to the recipient (often via check, wire transfer, or withdrawal/deposit).
2. Recipient deposits funds in their account and uses them (or a portion) toward the home purchase.
3. Lender sees a large/new deposit and asks for a gift letter plus supporting documentation to verify the source and nature of the funds.
4. Donor signs the gift letter describing the amount, relationship, and a no-repayment clause. Lender may also require proof of the transfer and copies of statements showing the movement of funds.
Why lenders require gift letters
Lenders need to evaluate a borrower’s ongoing ability to repay a mortgage. If the borrower financed part of their down payment with a loan from a friend/relative, that would increase monthly obligations and risk. A signed gift letter indicates the funds are not a loan and therefore typically do not count as additional debt. Lenders also look for unusual or large deposits in borrower accounts: when these are present, a letter plus documentation explain where the funds came from.
Are gift letters legally binding?
A signed gift letter stating that funds are a gift and are not to be repaid is a legally significant document and is generally enforceable as evidence of the donor’s intent. That said, enforceability can depend on jurisdiction and circumstances (e.g., claims of fraud or mistake). From a mortgage underwriting standpoint, the letter is relied on as part of the borrower’s file and the donor’s signature demonstrates intent not to collect repayment.
Do gift letters get reported to the IRS?
– The gift letter itself is normally not filed with the IRS.
– The donor is responsible for U.S. gift-tax compliance: gifts above the annual exclusion amount must be reported on IRS Form 709 (United States Gift (and Generation-Skipping Transfer) Tax Return). The recipient generally does not pay income tax on gifts.
– Gifts may also affect the donor’s lifetime estate-and-gift tax exemption and basis rules for property transferred as a gift (carryover basis). If a donor dies within three years after making certain gifts, special rules may apply (26 U.S.C. § 2035).
– If charitable gift substantiation is involved, separate IRS substantiation rules apply.
Contents of a gift letter (what lenders typically require)
There is no universal template, but lenders commonly request the following elements in a gift letter:
– Donor name, address, and contact information.
– Donor relationship to the borrower (e.g., parent, sibling).
– Exact dollar amount of the gift.
– Date the gift was or will be made.
– Statement that the funds are a gift and that no repayment is expected or required.
– Source of the gift funds (account where money was withdrawn).
– Borrower/recipient name and property address (if tied to a specific real-estate purchase).
– Donor signature (often dated). Some lenders also require the borrower’s signature acknowledging receipt.
– Supporting documentation: donor bank statements showing withdrawal and transfer, recipient bank statements showing the deposit, copy of cancelled check or wire transfer receipt, and proof of relationship (if required).
Practical step-by-step: how to prepare and document a gift for a mortgage
For the donor (giver)
1. Before transferring funds, confirm with the recipient and the mortgage lender what documentation is required.
2. Use traceable transfer methods (bank wire, check) rather than cash.
3. Prepare and sign a gift letter containing the required elements (see contents above).
4. Keep originals/copies of bank statements, wire receipts, cancelled checks, and the signed gift letter.
5. If the gift exceeds the annual gift-tax exclusion, prepare to file IRS Form 709 for that tax year (consult a tax advisor).
For the recipient (borrower)
1. Notify your lender in advance that you will receive gifted funds. Ask for their exact gift letter wording and documentation checklist (requirements can vary by loan program: conventional, FHA, VA, USDA).
2. Make sure the donor’s funds clear and show on your account in time for the lender’s verification (most lenders want to see the deposit and a paper trail).
3. Sign the gift letter if requested and provide copies of the transfer and account statements to the lender.
4. Keep originals of the gift letter and transfer evidence in case of future questions.
For the mortgage underwriter (what to ask for)
1. Signed gift letter with donor declaration of no repayment.
2. Donor bank statements showing withdrawal of funds.
3. Recipient bank statements showing deposit of the same funds.
4. Copy of the cancelled check or wire transfer receipt linking the donor to the recipient.
5. Evidence of relationship, if required by loan program.
Common gifting strategies (practical considerations)
– Inter vivos gifting: gifts made during the donor’s life reduce the donor’s taxable estate. Large inter vivos gifts can remove future appreciation from the donor’s estate, which may be desirable when gifting assets expected to rise in value (e.g., real estate).
– Timing: if a donor dies soon after making certain gifts, special IRS rules may cause the gift to be included in the estate (see 26 U.S.C. § 2035). Consult a tax advisor if timing is a concern.
– Basis considerations: gifts carry over the donor’s tax basis (carryover basis), which can affect capital gains when the recipient later sells the asset. In contrast, assets inherited at death typically receive a step-up in basis to the fair market value at the date of death.
– Lifetime/annual exclusion: donors should track annual exclusions and lifetime exemptions to determine whether they must file Form 709; gifts do not trigger income tax on the recipient but can affect the donor’s estate/gift tax filings.
Sample gift letter language (concise example)
I, [Donor name], hereby gift $[amount] to [Recipient name]. These funds were transferred by [method: check/wire] on [date] from account ending in [XXXX]. I confirm that this is a gift and that I do not expect repayment, in whole or in part, now or in the future. Donor signature: __________________ Date: _______
(Adjust to include donor address/contact info, recipient address/property address, and any lender-specific language.)
Practical checklist to avoid lender problems
– Ask the lender for their exact gift-letter template and documentation checklist.
– Use traceable transfers — avoid cash.
– Obtain and keep copies of the signed gift letter, donor and recipient statements showing the transfer, and any transfer receipts.
– Ensure the donor’s signature is on the letter and that it states the funds are not repayable.
– If necessary, have the donor provide proof of relationship (e.g., birth certificate for parent/child) or proof of source of funds (if large).
– If the gift exceeds the annual exclusion, the donor should consult a tax professional about filing Form 709.
Do gift letters protect against tax liability for the donor?
No — the gift letter is not the vehicle that determines tax liability. Gift tax rules are separate:
– The annual exclusion limits how much a donor can give each recipient in a year without filing Form 709 (donor files, if required).
– The donor is responsible for any gift-tax reporting and for tracking their lifetime exemption usage.
– The recipient generally does not owe income tax on the gift.
Fast fact and important IRS references
– The lifetime estate-and-gift-tax exemption and the annual exclusion change over time; check the IRS for current thresholds and filing requirements. For example, IRS guidance and Form 709 instructions explain reporting obligations for large gifts.
– For rules on gifts made shortly before death, see 26 U.S.C. § 2035 (adjustments for certain gifts made within three years of decedent’s death).
– For basis rules (carryover vs stepped-up basis), see IRS Publication 551 and related guidance.
Are gift letters sufficient to prove a gift in all cases?
Gift letters are persuasive and typically sufficient for mortgage underwriting. However, for legal/tax disputes or complex estate planning, additional documentation and legal/tax advice may be necessary. A signed gift letter is strong evidence of intent, but courts and tax authorities may look at the full factual record (transfers, subsequent behavior, etc.) if questioned.
The bottom line
A gift letter is a practical, commonly used document that confirms transferred funds are a gift and not a loan. It is especially important in real-estate transactions because lenders rely on it to determine the borrower’s true liabilities. Donors and recipients should document the transfer carefully, use traceable transfer methods, and consult tax or legal advisors when gifts are large or part of broader estate planning.
Sources and further reading
– Investopedia — “Gift Letter” (overview and examples): https://www.investopedia.com/terms/g/giftletter.asp
– Internal Revenue Service — Instructions for Form 709 (Gift/Generation-Skipping Transfer Tax Return): https://www.irs.gov/forms-pubs/about-form-709
– Internal Revenue Service — Publication 551, Basis of Assets (basis issues for gifts): https://www.irs.gov/publications/p551
– Internal Revenue Service — FAQs on Gifts & Inheritances: https://www.irs.gov/faqs/irs-procedures/individuals/faq-gifts-and-inheritances
– Cornell Law School Legal Information Institute — 26 U.S. Code § 2035 (adjustments for gifts made within 3 years of death): https://www.law.cornell.edu/uscode/text/26/2035
If you’d like, I can:
– Provide a custom gift-letter template formatted to a specific lender’s typical requirements (conventional, FHA, VA).
– Give a checklist tailored to your mortgage program or jurisdiction.
– Walk through an example with sample documents and where to store them.