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Ask the taxgirl: Same Sex Couples and the Homebuyer’s Credit

August 4, 2009 · 8 comments

I’ve received a number of “ask the taxgirl” questions related to the first time homebuyer’s credit. I’m hoping to wade through a number of those questions this week in consideration of the IRS’ new emphasis on preventing related fraud.

Enjoy!

Taxpayer asks:

Dear Tax Girl,

I’ve reviewed the information published by the IRS related to the new $8000 first time homebuyer tax credit in the Economic Recovery package. I am a current homeowner, and live in the home with my domestic partner, who is legally just a boarder, has never owned a home of his own, and has no ownership interest in our current residence.

Form 5405 states that an individual cannot qualify for this tax credit if they acquire the home from a related person. However, since federal law doesn’t recognize our relationship, it seems like we are legally unrelated persons.

All this said, do you believe that I could legally sell my home to my partner for its fair market value and he could then qualify for this credit?

It may not be in the spirit of this tax provision, but there are a number of costs that my partner and I have already absorbed (durable POA, trust, etc.) because we cannot get married. Wouldn’t taking advantage of this “loophole” be equitable under the circumstances?

Thanks!

Taxgirl says:

Gosh, this is a really interesting person. It kind of raises the question as to whether IRS can have their cake (make you unrelated for purposes of filing the form 1040) and eat it, too (hold you out as related for purposes of filing the form 5405). So I had to think about it for a bit.

The first thing I did was to check out the instructions again for federal form 5405 (available here as a pdf). The instructions define related persons to include:

a. Your spouse, ancestors (parents, grandparents, etc.), or lineal descendants (children, grandchildren, etc.).

b. A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock of the corporation.

c. A partnership in which you directly or indirectly own more than 50% of the capital interest or profits interest.

So, under those facts, you’re good. But then the IRS directs you to Pub 544 (downloadable here as a pdf). Pub 544 gives you a more exhaustive list of who qualifies as “related” – and again, I think you’d pass muster.

Initially, then, my answer is that I think that the transaction you described would work for purposes of the credit. But I think you have to be really, really careful and think this through for a number of reasons. Among them:

  1. The IRS specifically excludes property that you acquired “by gift or inheritance.” In order to insure that this transfer isn’t considered a gift (which would disqualify for the credit), you’re going to need to document this transaction extremely well. I would suggest an appraisal and a formal closing. Otherwise, you run the risk of it looking like a gift.

  2. Don’t forget about transfer taxes! Sometimes we jump through hoops to get to a favorable tax spot and we forget about other situations that we might be creating. Since this is to be a bona fide sale (see #1 again), you will be subject to transfer taxes on the sale – in most states, domestic partners and same sex couples are not exempt from transfer tax. If that’s the case, you may be subject to a transfer tax amount that would otherwise wipe out any tax credit benefit.
  3. Mortgage and fees. You didn’t mention whether you had a mortgage on the property or whether your partner would require a mortgage. Remember that the mortgage company would need to be involved at the sale – and that your partner would have to obtain a mortgage if he cannot pay you in full. You cannot lend him the money or otherwise exempt him from paying. If so, you would be making a gift (see #1 again).

So, my answer is that, at first blush, so long as your partner otherwise qualifies, he would be entitled to take the credit if you sold him your property. But consider all of the pieces of the transaction before rushing to claim the credit. You want to make sure that your numbers add up.

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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{ 4 comments… read them below or add one }

1 daily stock picks August 4, 2009 at 11:11 pm

at least everything is clear between the Form 5405 and his situation..

i hope everything will went good to that person and to his partner..

2 Urbie August 5, 2009 at 5:21 am

I wouldn’t want to be audited, if I tried this one. The taxpayer might feel better, having stuck it to The Man, but it’s probably more trouble than it’s worth (if, in fact, it would benefit him at all). He doesn’t mention whether or not his partner is a Qualifying Relative, and I assume that’s not the case, since he’s got the money to buy a house — but it’s worth noting (not that it’s strictly relevant) that you can be a QR without being related in any biological or familial way….

3 Catherine August 5, 2009 at 4:51 pm

I am certain a “partner” is not considered a relative (even a QR) in any way. How? My “partner” (we’re married but I think American’s are more comfortable with this term) have been together 12 years. We had to move overseas because my “partner” got a transferred with her job (government). After 40 years of US citizenship, and a marriage license from the state of California as well as a marriage license here, I was informed by the US government that I could not, under any circumstances, have a Visa or Military ID card. You can normally, at least, get a temporary one for even a distant relative. I can’t even drive our car because it has USEUR tags. Only “relatives (including my partners second cousin)” have that right. However, I did watch, with some dismay, as a military contractor divorced his wife of 25 years, married a Lithuanian “working girl” he met two weeks prior and was able to get her insurance, an ID card and visa within a few weeks after a civil marriage ceremony (always good to know my taxes are supporting the working girls of Lithuania). These are more rights than I’m given after 40 years of US citizenship and monogamy. That said, the government here couldn’t understand why the American government wouldn’t afford me a visa to remain with my “partner” so we hired a local attorney. We have a signed statement from the US Federal Government, and the local military command stating that I am, in no way, related to my “partner” (even with a state marriage license) and therefore I am unable to receive any US benefits awarded spouses or even relatives overseas. Unless the guy above is somehow weirdly and distantly related to his “partner”, he’s in the clear. I’d be happy to send him the biblical amounts of paperwork we had to compile for the court system here to show how “Not” related we are. At least the government here, after 2000 Euro’s, was far more civil minded about the whole thing and while they simply couldn’t understand why or how the US could refuse me even something so simple as an ID card or any spousal rights, they gave me a visa wherein my own country, would not. It’s amazing how easy it was to get a letter stating that we not only have no rights under US law as a couple. We even got a guy who was kind enough to laugh at us while writing out the letter. Best of luck to you and your husband. In my opinion and the opinion of the American government, you aren’t related. Never have been, never will be. If I was you, I’d sell away.

4 Urbie August 6, 2009 at 11:34 am

Catherine, what I’m talking about is Qualifying Relative for tax purposes. As I say, it’s probably not relevant to this question, because if the guy has the cash to buy a house, he probably makes more than $3,500 a year. I just bring it up because a QR can be someone who is not biologically related.

Here are the specifics:

To be claimed as a qualifying relative, the person must meet all of the following criteria:
Not a qualifying child – The dependent cannot be a qualifying child of another taxpayer.
Gross Income – The dependent earns less than the personal exemption amount during the year. For 2008, this means the dependent earns less than $3,500.
Total Support – You provide more than half of the dependent’s total support during the year.

Relationship – You are related to the dependent in certain ways (be related to the taxpayer is one of several ways, or live with the taxpayer for an entire year, and the relationship must not violate local laws)

Joint Return – If the dependent is married, the dependent cannot file a joint return with his or her spouse.
Citizenship – The dependent must be a citizen or resident alien of the United States, Canada, or Mexico.

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