First Time Buyer Housing Tax Credit Loophole?
Courtney Cooper on 04 8, 2009
“First time home buyer credit” Logic says that this should be simply a buyer who has NEVER OWNED A HOME, right? The recent 2009 $8000 tax credit to stimulate housing and also hopefully our economy is willing to go ahead and forget a previous home purchase as long as it wasn’t owned anytime in the last three years.
But that is not the loophole I am concerned about…
This particular slant is different. Go no further than the National Association of Home Builders (NAHB) who have created a FAQ website called (wait for it) FederalHousingTaxCredit.com. The site is actually laid out quite well and provides amazingly clear explanations for the housing credit. In the answer to question number 2 in their FAQ page, NAHB defines a first time home buyer for the purposes of the credit:
“What is the definition of a first-time home buyer?
The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse.
For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit. However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.”
Can this be right It certainly seems to go against the spirit of the tax credit which was put into place to help those who are first time home buyers (or at least almost first time home buyers).
From the IRS site: The instructions for the “First-Time Homebuyer Credit” form 5405 also define a first time home buyer.
According to the IRS, you are considered a first-time homebuyer if you purchased your “main home” during the qualifying date range and it is located in the US. You and your spouse if married also must not have owned any other “main home” during the previous three years. The IRS goes on to define your main home:
“Main Home: Your main home is the one you live in most of the time. It can be a house, houseboat, housetrailer, cooperative apartment, condominium, or other type of residence.”
This looks like a huge loophole to me.
I personally do not consider someone with rental property and/or a vacation home to be a first time home buyer just because they do not own their “principal residence” or “main home” – I would love to hear of an example that doesn’t seem “sneaky”, but it does seem to be an open work around for a creative individual for now. Have you heard of any unique situations on this?
About the Author: Courtney Cooper
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38 Responses to “First Time Buyer Housing Tax Credit Loophole?”
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“It certainly seems to go against the spirit of the tax credit which was put into place to help those who are first time home buyers….”
It was put into place to revive the housing market. Helping first-time homebuyers is incidental.
Rather than put up barricades to make it difficult for homebuyers to use this credit, they’ve opted to make the definition of First Time Home Buyer fluid and liberal.
This helps a larger number of people to take advantage of this credit, hence helps the housing market to rebound, and along with that provides jobs to home builders, furniture manufacturers, lawn-mower makers, houseware and kitchen item sellers, carpet-layers, paint stores, etc., everyone and anyone who stands to make a little dough from the new homeowner.
I’m pretty sure this is the standard definition used for most first-time buyer programs.
Hi Marlow – I completely agree with you on stimulating the economy with this and I think it should go a step further and be bigger and broader, but calling it what it is would be more straightforward in my mind. How are you going to let others who qualify know about it if you just call it a first time home buyer credit?
Hey Aubrey – True in regards to the three year portion and it should be their principal residence, but a lot of the main stream public is unaware of the broader definition of a first time home buyer. The credit was put into place to encourage new home buyers and calling it a first time home buyer credit when it includes other exceptions might seem to exclude someone who actually qualifies. I guess I shouldn’t be surprised – since when has tax lingo been clear anyway:)
Here is HUD’s definition (similar):
http://www.hud.gov/offices/hsg/sfh/ref/sfhp3-02.cfm
people still believe this is going to revive the housing market enough to stimulate the economy? amazing.
Courtney,
I think part of improving the housing market is encouraging low inventory. If the credit were available to people who currently own homes, it might encourage more people to put their homes on market, which would make matters worse than they are. So anyone who doesn’t currently own a home, and hasn’t for at least three years, is the target audience.
Courtney,
I think part of improving the housing market is encouraging low inventory. If the credit were available to people who currently own homes, it might encourage more people to put their homes on market, which would make matters worse than they are. So anyone who doesn’t currently own a home, and hasn’t for at least three years, is the target audience.
OH! You’re my new favorite blogger fyi
Hi Courtney,
Sorry, I just realized you were looking for examples of a person who owns property and not a principal residence. I know many.
1) Client has rented their principal residence for over 10 years and has never owned a home. Client invests their monies in stocks, bonds and real estate. They own investment property, but not a home. That they have investments of property is not relevant. (see end to see why they do not qualify)
2) Client’s source of income is rental property. Owns many rental properties. His “work” is rental property and the income from the rental property is the source of funds to buy his first home. He has done this since he was 18 as his “work” is owning muli-famiy units. He is getting married now at age 33 and is buying “his first home”.
3) Young man, never owned a home, owns a little condo up in Snoqualmie that he uses when he goes up there to ski in the winter. Sold his residence condo 3 years ago and has been renting close to work ever since that time. He is now ready to “get back in” and buy a residence to replace the condo he sold over 3 years ago. He is a perfect example of the target audience for this credit. Someone who once owned a home, sold it, and rented waiting for “the right time to buy”. The fact that he owns a little condo to use when he goes skiing is irrelevant.
4) Client owns a bed and breakfast. It is their source of income. They now have enough income to buy their first home.
In the first example, the client earns too much to qualify for the credit. So the test is, if someone is too “wealthy” for the credit and owns property that is not their principal residence, they will be disqualified on the income cap, not the “do you own other property that is not your principal residence?” question.
For people whose income source is derived in whole or in part from property, disqualifying them because their livlihood involves owning property, is not appropriate.
Wooohoo! I qualify! My mortgage buddy has been receiving calls all over the place for refinances because of this new rule.
Here’s another example.
Buyer is currently a non-occupying co-borrower/owner of a home (to help the occupying borrower, a family member, qualify for the loan). He does not live there.
He qualifies as a first time buyer, since it is not his principle residence.
Thanks you guys for all the great examples. I am still amazed, though, at how many buyers do not know that they qualify. They hear the term “first-time home buyer” and dismiss themselves as possibly being included.
Courtney,
I have a unique situation. I owned a house in LA which I had used as a primary residence. I moved to Dallas in July 2006 for a new job, but could not sell the house in LA.
Does the 3 year waiting period begin when I moved out (July ‘06)? Or when I finally sold it (February ‘07)?
Also, I bought a house in Dallas in December ‘06, planning on living in it. But because of the situation with the house in LA, I decided it would be imprudent to have 2 mortgages. So I sold the house in Dallas in April ‘07, never having lived in it. I ass-u-me this doesn’t count against me, but would love to hear your take.
Tom – you DO have a unique situation. First off: get a tax attorney to tell you because although I do have a background in accounting, I am in no way qualified to give you tax advice – especially given how fast it changes!!!
That being said, if it were me, I would also assume that the second purchase might not count against me if I truly never lived in it. (did it just sit vacant for a few months or what happened there?) I would also think it would be reasonable to consider the date that the residence stopped being your principal residence as the date you moved out, but if you go to buy now, I would strongly encourage you to get a tax attorney or accountant to help you sort it out because claiming the $8k is going to throw up some red flags most likely and you want to have a qualified professional in your corner if/when it happens.
Thanks for the sage advice Courtney.
Yes, the second house sat vacant. So I assume the same as you.
But that’s good advice to get a tax attorney. Only question is, will that cost more than the 8K credit is worth? Also, how does one find a qualified tax attorney?
My spouse and I want to buy a house jointly with our son. My spouse and I do not qualify as 1st time buyers, but our son does. From what I’ve read I believe our son would qualify for the $8,000 tax credit, as the home will be his residence and he is a 1st time buyer. Do you agree with my
thinking?
I am wondering if there will be any loop holes or extensions made for anyone not making the 3 year new home buyer time frame. I was divorced and renting for the past 2 years, I am now buying a home as an individual. seems a little unfair that I should get no credits for deciding to buy now. I know they can’t make consessions for every circumstance but by the 2 years it is evident that I did not run out to list my house to buy a new one.
I have a question about this as well, if anyone wants to chime in. I noticed that buying a home from a close relative does not count towards this tax credit, meaning, if I were to buy a house from my parents, as a normally qualified first time home buyer, I could not claim this credit. With that in mind, what if the home I had sold two years ago, that we lived in, was bought from my wife’s parents, given the fact that it does not count as a “home purchase” under the spirit of this credit, how can they count it against me as a home purchase in the past? Is this a loophole I might be able to get under?
Andrew,
They are trying to prevent people from pretending to buy and sell between family members to grab some free money, so no, I don’t think there’s a correlation.
#16,
Check the math and rules for doing a lease purchase and closing when you hit the 3 year mark.
clay,
Who is going to be taking the interest deduction on their future returns? You or your son?
My son would be taking the complete interest deduction and the property tax deduction on his return. Therefore, I believe qualifies for the federal $8K credit and I also believe he qualifies for the California $10K credit. I am just looking a second opinion because my wife and I would be joint owners and consigners. What I’ve read doesn’t give any good examples or similarities when both parents are involved with the child’s purchase
clay -
why don’t you make your son learn some financial responsibility and buy his own home when he is ready. it will be better for him in the long run than mom and dad buying it and trying to show him how to game the system.
So you believe it is financially irresponsible to buy a home if you have to get a loan or a co-signer? That makes no sense at all. Almost all homebuyers get a loan from somewhere. Getting it from parents doesn’t make it a different ballgame. In fact, it is smart use of money. If the parents have the money to make the loan, at a reasonable interest rate to their child, everyone wins. The child gets a good rate and the parents have a sound investment. On the other issues, many banks require co-signers for borrowers of a certain age regardless of their financial situation. My son was debt free, had a good job, a car (paid for), a 20% down payment, and a roth IRA with a few thousand dollars in it — all without blemishes on his credit report and all from working his tail off throughout high school and college. Regardless, during the credit crunch, at age 23 he could not find a local bank that would loan him the money without a co-signature. Honestly, people who pop off ignorant remarks are working from a limited view that smacks of jealousy and frustration at their own situations and isn’t helpful to people who are here to share in a HELPFUL exchange of information. Perhaps you should join a frustration management blog instead.
For the ‘relative’ problem, my ’stepson’ (of 23years) qualifies as being eligible for the credit but my ‘blood’ son (27years old) does not !! Can Someone please explain this illogic to us ? There has to be a creative way to address this discrepancy. Please help.
Very interesting. My husband and I thought that we were disqualified because we own trailer from 1976 that cost 5k. However since we are in a trailer park and not on a solid foundation, do you think we qualify?
I am going on this by the info referenced on Huds website:
http://www.hud.gov/offices/hsg/sfh/ref/sfhp3-02.cfm
Hi Amy, while HUD’s definition would make it seem like you do qualify, I would check with your tax accountant to be sure before you do anything because the IRS defines the main home and might exclude you. I think there are so many little loopholes in this that it is best to get a professional tax person to really help out.
2nd try, any help please. For the ‘relative’ problem, my ’stepson’ (of 23years) qualifies as being eligible for the credit but my ‘blood’ son (27years old) does not !! Can Someone please explain this illogic to us ? There has to be a creative way to address this discrepancy. Please help.
Sorry Relative – I just have no idea without getting all the details and even then I wouldn’t be qualified – I would suggest talking to a tax person.
Relative,
Why would you dispute this? Your son obviously doesn’t qualify as he is a “family member”. Are you hoping to disqualify your stepson as well? What is your goal?
I am wondering if I meet all the other requirements, will I be able to purchase a duplex – live for 3 years on the one half and rent out the other side – and qualify for the tax credit?
It really doesn’t make sense if a vacation home does not disqualify, but a mobile home owner cannot qualify even though his house is depreciating in value and the vacation home would appreciate. That lets us out since we also bought the land under the home in 2008. We are interested now in building on our new land and would not qualify for the credit. That stinks, especially since someone that does not pay taxes could get a check back from the IRS for the full 8,000 if they bought a home.
If I were to buy a home from my husband’s grandmother (who has a different last name, obviously) would the IRS care? Technically I suppose we are legally related somehow, but not what I would call a close relative at all. What do you guys think?
Family and related parties are defined in the law. Ancestors are included, so your husband’s relationship to his grandmother would disqualify any purchase that he is involved in.
I have a interesting one that I was wondering if anyone could see. I have a client that is looking to purchase a home. She has never owned but her fiancee has. He owns a condo with another that he hasn’t lived in for a year. The house their interested in may require both to be on the loan. Is there anyway they can still qualify for the tax credit with the both being on the loan? Or would it only be true with her soly? Thanks!
I don’t think it matters who is on the loan. It matters who signs the purchase agreement and who owns the deed to the property.
Is this a loophole? My partner and I (both first time home buyers) will be closing on a home in a few weeks. Because we have to file separately for federal taxes (as our marriage is only legal in MA), will we each be elligible for the $8000 tax refund (thus totaling $16,000) on the same home?
I am trying to figure out if we qualify…
We are in the process of buying a house (my first).
My wife co-owns (with her parents) the duplex that we are living in right now.
However, her name is on the deed, but she claims absolutely no tax benefit from the property.
Her parents write off the interest, as well as any ‘improvements’ that are done to the place. Does this tax trail (her parents claim entirely) allow us to fall through the loophole? It seems to me,that there are two approaches: 1) What if we claim the credit and disclose all of this information and let them decide if it appropriate? or, 2) Since she has never claimed anything on taxes, then it would not show up in an audit situation anyway (I assume an audit is highly likely)… Really what would happen?
I am trying to figure out if I can qualify….My brother and I inherited a house from our father when he passed away. I have lived in the home during the past 3 years, but I have never before “purchased” a home until this year. Will I be denied the credit?