Gift Letter

A gift letter is a written, signed statement from a donor confirming that funds or property transferred to a recipient are a true gift and are not expected to be repaid. Lenders commonly require gift letters when gifted funds are used for a mortgage down payment so they can distinguish gifts from loans and assess a borrower’s true financial obligations.

Key points

• A gift letter documents that transferred funds are not a loan and will not be repaid.
• Lenders typically require a gift letter for down payments to ensure the borrower isn’t taking on hidden debt.
• Gifts can be cash, checks, forgiven debt, transfers of property, or below‑market loans.
• Gifts that exceed the annual IRS exclusion generally must be reported and may reduce the donor’s lifetime estate-and-gift tax exemption (for example, the exemption was about $12.92 million per individual in 2023).

How gift letters work

Gift letters are written and signed by the donor and often submitted to a lender as part of mortgage underwriting. The letter should clearly state the relationship between donor and recipient, the amount and date of the gift, and that repayment is not expected. Lenders may ask both donor and recipient to sign to confirm the terms.

Common gifting strategies

• Inter vivos gifting: transferring assets during the donor’s lifetime to reduce the taxable estate. Timing matters—certain transfers made shortly before death can be subject to special adjustment rules.
• Gift appreciated assets strategically: gifting assets expected to appreciate keeps future gains out of the donor’s estate. Gifting highly appreciated property may transfer the donor’s carryover tax basis to the recipient, whereas inherited property generally receives a stepped‑up basis.

Gift letters and mortgages

When a lender sees large or unusual deposits in a borrower’s account, it may require a gift letter to verify the source and nature of the funds. Mortgage underwriters use the letter to confirm the borrower has no repayment obligation that could affect debt‑to‑income ratios.

What to include in a gift letter

While formats vary, a typical gift letter includes:
* Donor’s name, address, phone number, and relationship to the recipient
* Recipient’s name
* Exact dollar amount of the gift (or estimated value of non‑cash items, supported by documentation)
* Date funds were transferred or will be transferred
* A clear statement that the funds are a gift and will not be repaid
* Donor’s signature (and sometimes the recipient’s signature)

Tax and reporting considerations

• The IRS requires reporting of gifts that exceed the annual exclusion amount; donors may need to file a gift tax return (Form 709 in the U.S.).
• Large gifts may use up part of the donor’s lifetime estate-and-gift tax exemption.
• Charitable gifts and gifts to a spouse or qualified charity are treated differently under tax rules.

Are gift letters legally binding?

Yes. A signed gift letter is a legally binding document relied upon by lenders and other parties. Donors and recipients are expected to adhere to the letter’s terms.

Bottom line

A gift letter provides formal assurance that transferred funds are a gift, not a loan. It’s commonly required in real estate transactions to help lenders evaluate the borrower’s financial obligations. Donors and recipients should include clear details in the letter and be aware of tax reporting requirements for large gifts.