Home Downpayments: Gift or Loan When Family Money Is Involved
I read an interesting article in Sunday’s Times about how the credit crunch has resulted in more people borrowing money from their friends and families in order to purchase a home. There is really nothing new about this phenomenon. Parents have long gifted or loaned their children money for a home down-payment.
There is also nothing new about the myriad of problems that arise when the parties divorce. Since the down payment generally represents a significant portion of the marital assets, all involved, husband, wife and their parents, may claim the down payment to be theirs.
The threshold question is –was the “advance” from the parents a gift or a loan? If it was a gift, was it a gift to one or both of the parties?
One of the parties may claim that the “advance” from his/her parents was a loan, which must be repaid when the marital home is sold. In such case, inquiry must be made as to whether there was there a note or a mortgage? Was there any documentation or acknowledgment of the loan? Were there any loan payments made during the marriage? Was interest on the loan declared as income?
In the absence of a writing or loan re-payments it may be hard to prove that the advance was a loan. The fall back position is generally that the advance was a gift to only one of the parties. Assuming that the gift was made by check, the face of check should be determinative-(i.e., a check to Mr. and Mrs. Jones is a gift to both parties but a check to Mrs. Jones may be a gift to only the Wife).
Many lenders require a “gift letter” confirming that the down payment was a gift, not a loan. This letter certainly may of value in determining purpose of the advance. Likewise, did the gift trigger the filing of a gift tax return?
In order to avoid future disputes, when the home purchase is made, there should be a writing, signed by all involved, clearly defining the terms of the transaction, identifying it as a loan or a gift, and, if it is a loan, setting forth the payment terms.