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.
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?
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:
- 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.
- 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.
- 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.