Home Bought from Parents Not Eligible for Homebuyer Credit

Taxpayers who bought their first home in part of 2008, 2009 and part of 2010 may have been eligible for the First-Time Homebuyer Credit — but not if the home was purchased from a relative.  The Tax Court recently ruled that this is true even if the IRS forms and publications may not have included this caveat.

The Tax Court case involved someone from Wisconsin who purchased a home from his parents.  The person’s accountant filed a tax return claiming the maximum $8,000 First-Time Homebuyer Credit.  The taxpayer did meet all of the requirements for claiming the credit — except that he bought the home from his parents.

In front of the Tax Court, the taxpayer produced evidence that the IRS form that you claim the credit on (Form 5405) and the IRS publication dealing with the credit (Publication 4819) for 2008 did not specifically say that purchasing a home from a relative disqualifies you from taking the credit.  I looked, and this is true for the 2008 Form 5405 and even for the current version of Publication 4819.  (The 2009 and 2010 versions of Form 5405 DO mention the caveat about purchasing from relatives.)

Unfortunately for the taxpayer, the Internal Revenue Code trumps forms and publications.  Section 36(c)(3) of the Code specifically states that homes purchased from a relative are not eligible for the credit.  And Section 36(c)(5) goes on to explain that parents fall under the definition of a relative.  Here’s more from the Court ruling:

The provisions of section 36(c) are clear.  Form 5405 and Publication 4819 provide general instructions.  They do not purport to provide all rules and limitations applicable to the FTHBC. The apparent failure of some IRS publications to explain the “no-purchase-from-family” limitation of the FTHBC has no effect on the authority of section 36(c).

The apparent failure of petitioner’s accountant and of the copy of Form 5405 and the tax preparation software that petitioner’s accountant used to expressly explain the “no purchase-from-family” limitation of the FTHBC is unfortunate for petitioner, but those failures do not provide any legal basis to allow petitioner the claimed $8,000 FTHBC.

The Tax Code can be confusing to navigate, even for professionals.  I don’t claim to know all the ins-and-outs of every Code section — far from it!  But I also find it shocking that this person’s accountant wouldn’t have looked a little deeper into the requirements of a very common tax credit to make sure that the taxpayer met all the requirements before putting an $8,000 tax credit on the person’s return.