The Tax Attic with Jerry Coon – July 30, 2009

Jerry Coon, Enrolled Agent

Jerry Coon, Enrolled Agent

Do you qualify for the First Time Homebuyer credit?

There are some government programs that seem to generate more and more questions. The federal First Time Homebuyer Program is one of those programs. The fact that there is $8,000 in totally refundable dollars at stake might have something to do with creating questions.

Taxpayers are trying to fit home purchases into the credit. Some of those purchases do not qualify while some do qualify, but a particular scenario was not considered when the law was enacted and now requires some explanation. Let’s go over some of those instances where the credit is in question.

The questions can be grouped in two groups. The first group concerns questions of whether the taxpayer is considered a first-time homebuyer. Did the taxpayer own or constructively own a home within the past two years? Seems like a straight-forward question, but it really isn’t. The second group of questions concerns the purchase. Who did the taxpayer buy the home from or jointly with, and does it qualify for the credit?

The first group of questions comes up in conjunction with the requirement that in order to be considered a first-time homebuyer, the taxpayer must not have owned a personal residence for the past two years.

For example, a taxpayer owns a personal residence, but five years ago converted that house to a rental when the taxpayer moved into a rented apartment. The taxpayer still owns the rental. Does the taxpayer qualify for the credit even though he/she still owns the prior residence? The Internal Revenue Service says that because the taxpayer did convert the prior residence more than three years ago and has not used the rental as a residence for even one day within the previous three years, he/she does qualify for the credit.

Another example involves married taxpayers. A husband and wife have been separated for the last five years and file separate tax returns. The husband has not owned a house during the previous three years. The wife currently has owned and currently occupies a residence. Can the husband claim the credit because they filed separate tax returns, maintain separate households, and he has not owned a residence for the last three years? The IRS says that neither of the taxpayers can own a residence in the qualifying period of the last three years. It does not matter if separate tax returns are filed. It does matter that each of the taxpayers maintains separate households. If one of the spouses owns a residence, neither will qualify for the credit.

In a little different situation, taxpayers get married and move into a rented residence in Grand Rapids. The husband has never owned a personal residence. The wife did own a residence in Chicago, but has not lived in it since she was transferred two years ago to Grand Rapids. If they now buy a personal residence, will the husband qualify for the credit? No, because the rules require that neither spouse can own a residence within the last three years. It does not matter that they were not married when the wife lived in the personal residence. Once they are married, each of the two must meet the qualifying three-year period without a residence requirement.

Is there a hardship exception for job transfers or medical situations? No, there are no exceptions in the rules—period.

A little twist on the situation has the husband buying the house before the marriage. Does the fact that they are filing a joint return when applying for the credit mean the husband cannot claim the credit? The husband will qualify for the credit because he was single when he bought the house. Eligibility is determined as of the date of purchase and on that date, he did qualify.

Quite often, first-time homebuyers are young people and for a variety of reasons do not qualify for a mortgage. They may not have earnings history or credit history or not enough down payment. The logical solution is to have the parents co-sign the mortgage or even become joint owners of the home. However, the parents do not qualify for the credit. Does this disqualify the young person? No, because the rules state that unmarried taxpayers separately qualify for the credit. The parents do not qualify, but the young person does qualify. It would be a mistake for the parents to buy the home and then subsequently sell it to the young person. The home must not be purchased from a parent or other close family member. The home can be purchased from a cousin however. A cousin is not considered a close enough family member to disqualify the taxpayer.

There are many more examples of situations clarifying when a taxpayer does or does not qualify for the credit. For taxpayers who have questions, it might pay to contact a tax professional to get a correct answer. This is Jerry Coon signing off.

 Jerry Coon is an Enrolled Agent. He owns
Action Tax Service on Northland Drive in Rockford.
His e-mail address is

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