First-time home buyers often have difficulty gathering enough cash for down payment and closing costs. As a parent, relative or close friend, you may be able to help by providing a tax-free gift.
For 2009, you are allowed to give up to $13,000 in cash or valuables (the limit was $12,000 in 2008) to any other individual with no tax consequences to you, the donor. (Recipients do not pay taxes on gifts they receive, no matter how large.) Your spouse could also give up to $13,000 to the same person. In addition, each of you could give as much as $13,000 to the recipient's spouse. In other words, you and your spouse could give your child and his or her spouse up to $52,000 this year with no tax consequences. That could go a long way toward helping a young couple purchase a home.
If you decide to go this route, bear in mind that the recipient's lender will want you to provide a gift letter including:
Names of donor and recipient and relationship
Amount of gift
Source of funds (bank account, etc.)
Reason for gift, including address of property being purchased
Statement specifying there is no expectation of repayment
Of course, you could give more than $13,000 per recipient, but doing so would have an impact on your lifetime gift-tax exemption (currently $1 million). Although gifts more than the annual limit are called "taxable gifts," you wouldn't actually owe taxes on such gifts unless you exceed your $1 million lifetime limit. Generally, gifts in amounts above the annual limit must be reported on IRS Form 709.
Also note that taxable gifts -- again, those over the annual limit -- made during your lifetime will reduce the amount of your estate excluded from estate-tax liability. For all the details, be sure to consult a knowledgeable tax professional or financial advisor.