Additional Clarification Of Tax Questions Provided

Updated September 4, 2009

Kristy Maitre, the Iowa Senior Stakeholder Liaison for IRS has been busily dredging out answers from the National Office of IRS on questions that practitioners are frequently raising. Some of the most common questions involve the first-time homebuyer credit and tax issues associated with disaster relief. Keep in mind that the answers she has received are not “official” IRS pronouncements. They are simply responses to questions that have been asked. Indeed, it is possible that a different response to the same question could either occur or may have already occurred. Hopefully you will find the Q and A helpful.

First-Time Homebuyer Credit

Question: Assuming all other qualifications are met, can a person purchase a home from their father-in-law as long as it is purchased by and deeded to the non-related spouse only?

Note: Various answers have been received on this question. Here are the various responses:

Answer 1: No. A married couple is treated as one taxpayer. It doesn’t matter how the transaction is structured with the deed and mortgage. They will not qualify for the credit because of the related party rule.

Answer 2: Yes. In-laws are neither ancestors nor lineal descendants and are, therefore, not related persons for purposes of the credit.

Answer 3 (Response by Michael Montemurro of IRS Office of Chief Counsel to Rep. Baldwin (D-WI) dated June 15, 2009: Yes. In-laws are not related persons for purposes of the first-time homebuyer credit.

Question: Does the purchase of a home by a first-time homebuyer from a related party still qualify the buyer for the credit if the sale is an arm’s-length fair market value sale?

Answer: No. A purchase from a related party does not qualify even if the purchase is a bona fide sale.

Comment (by McEowen): The statute (I.R.C. § 36(c)(3)) defines a purchase as an acquisition
that "is not acquired from a person related to the person acquiring such property, and the basis
of the property in the hands of the person acquiring such property is not determined in whole or
in part to the adjusted basis of such property in the hands of the person from whom acquired, or
under section 1014(a) (relating to property acquired from a decedent)." As written, the provision
can be read to mean that purchases from related parties qualify for the credit if purchased from
a related party at market value. Indeed, that is the position that CCH has taken in their report on
the credit (Housing Assistance Tax Act of 2008: Law, Explanation, and Analysis (CCH) ¶205.).
However, the provision could also be interpreted to mean that any purchase from a related party
is unqualified and that any purchase, even if not from a related party is ineligible for the credit if
either of the basis provisions applies. Indeed, IRS has interpreted identical language contained in
I.R.C. §1400C(e)(2) (the D.C. First-Time Homebuyer Credit) as prohibiting all related party
transactions (see the instructions for Form 8859). Tax counsel for the U.S. Senate Finance
committee is presently refusing to acknowledge the ambiguity in the statutory language (in spite of
a Congressional Research Service Report of Sept. 12, 2008, on the matter which points out the
ambiguity in the provision), maintaining instead that all related party transactions are not eligible for
the credit.

Question: I have a client who purchased a home 3 months ago and hired a contractor to do some remodeling before she moved in. When she tried to contact him he never returned her calls. She has since put that home on the market and purchased another one. Can she forego the first home and take the credit on the second home that she will be living in at the end of the month? She never lived in the first home.

Answer: As long as the first property was not occupied as a principal residence, then it would appear that the second residence would qualify if she occupies it as her principal residence and she meets all other qualifications and requirements.

Question (Version A): What is the result if the house is sold to a first time home buyer on a contract for deed, and the deeds are signed and executed, but held in escrow and not filed until the provisions of the contract have been met? Normally a “Notice of Contract for Deed” is filed on the property at the time of purchase, but not the actual deed. Does this buyer qualify for the First-Time Home Buyer Credit upon signing of the contract for deed (which may be a significant period of time before the recording of the deed)?

Answer: A taxpayer is not eligible for the first-time homebuyer credit unless there is a completed sale. Under the facts presented below, the contract for deed may not be a completed sale because all of the provisions of the contract have not been met. However, the determination of whether there is a completed sale would depend on the facts and circumstance of the particular case and perhaps State law.

Question (Version B): Can a taxpayer claim the first-time homebuyer credit if the purchase is pursuant to a seller financing arrangement (for example, a contract for deed, installment land sale contract, or long-term land contract), and the seller retains legal title to secure the taxpayer's payment obligations?

Answer: If the taxpayer obtains the "benefits and burdens" of ownership of a residence in a seller financing arrangement, then the taxpayer can claim the credit even though the seller retains legal title. Factors that indicate that a taxpayer has the benefits and burdens of ownership include: (1) the right of possession; (2) the right to obtain legal title upon full payment of the purchase price; (3) the right to construct improvements; (4) the obligation to pay property taxes; (5) the risk of loss; (6) the responsibility to insure the property; and (7) the duty to maintain the property.

Question: The taxpayer moved out of their home in July 2006 and moved to another state and established a home there (e.g., moved into a mobile home owned by a friend, got a driver’s license in that other state, registered their car in the other state, enrolled a child in school, got a job, filed a part-year tax return, etc.), but still had their house on the market (closed on the sale in January 2007). Would the taxpayer qualify for the credit because they home they owned was no longer their principal residence after July 2006?

Answer: The Code requires that the taxpayer must not have owned a home as their personal residence in the prior three years. Thus, if the taxpayer moved out in July 2006 and the home was no longer the taxpayer’s principal residence from that point on, the taxpayer would qualify for the credit as of July 2009 (assuming all other requirements are satisfied).

Energy Credits

Question: Does the $500 lifetime limit on the various energy credits still apply?

Answer: In 2007 there was a $500.00 lifetime limit. That law was not extended into 2008. Legislation enacted in 2009 established new standards and limits. Under the 2009 provision a $1,500 lifetime limit is established and does not have to be reduced by any prior year limit.

Education Tax Incentives

Question: Are there any changes to the tax credits for college expenses?

Answer: Yes. The Hope credit has been retooled and renamed. It is now called the “American Opportunity Credit.” It modifies the prior Hope Credit for tax years 2009 and 2010, and is now available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student. The full credit is available to individuals whose modified adjusted gross income (AGI increased by foreign income that was excluded and by income excluded from sources in Puerto Rico or certain U.S. possessions) is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels and is completely phased-out for taxpayers with modified adjusted gross income of more than $90,000 ($180,000) for taxpayers that file as married filing jointly. These income limits are higher than under the existing Hope and Lifetime Learning Credits. After 2010, the Lifetime Learning Credit may be the only credit available to assist with college expenses.
Here are some other points on the retooled credit:

For 2009 and 2010, the credit can be claimed for tuition and certain fees paid for higher education – that includes expenditures for “course materials” (books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance.
It can be claimed for expenses for the first four years of post-secondary education.
The amount of the credit is based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year.
The credit will reduce tax liability one dollar for each dollar of credit for which you're eligible. If the amount of the American Opportunity Tax Credit for which you're eligible is more than your tax liability, the amount of the credit that is more than your tax liability is refundable to you, up to a maximum refund of 40 percent of the amount of the credit for which you’re eligible.
The credit is claimed using Form 8863, attached to Form 1040 or 1040A.
The tuition and fees tax deduction cannot be claimed in the same year that you claim the American Opportunity Tax Credit or the lifetime learning credit. You must choose among them. You also cannot claim the tuition and fees tax deduction if anyone else claims the American Opportunity Tax Credit or the lifetime learning credit for you in the same year. A tax deduction of up to $4,000 can be claimed for qualified tuition and fees paid. Though the credit will usually result in greater tax savings, taxpayers should calculate the effect of both on the tax return to see which is most beneficial — the tax credit or the deduction. Often tax software will automatically compare the two for you.

Question: Is there a new benefit that applies to college savings plans (commonly known as 529 Plans)?

Answer: Yes. A qualified, nontaxable distribution from a Section 529 plan during 2009 or 2010 now includes the cost of the purchase of any computer technology or equipment or Internet access and related services, if such technology, equipment or services are to be used by the beneficiary of the plan and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.

Disaster-Related Issues

Question: Must a taxpayer itemize to take losses associated with the 2008 Midwest disaster?

Answer: Yes. Losses of personal use property that arose in the Midwest Disaster area are not subject to the $100 or 10% of adjusted gross income limitations, and a taxpayer must be able to itemize to take the loss. If the taxpayer is not covered by the Midwest disaster rules, but is covered by the national disaster rules, a taxpayer can deduct the loss even if the taxpayer doesn’t itemize. The disaster provisions in last year’s legislation are not national in scope. There are “national disaster provisions” and “Midwest disaster provisions.” For taxpayers in the Midwest disaster area, the “national” disaster provisions don’t necessarily apply.
Here are some other pointers:

Qualifying losses include losses from casualties and thefts that arose in the disaster area and that were attributable to the storms and tornadoes.
If you live in a Midwestern disaster area and you elect to deduct the loss in 2007, see Publication 4492-B for special instructions on how to complete your tax forms.
Page 13 of the Publication 547 - addresses the issue of whether or not you are required to itemize to take the casualty losses from the Midwest Disaster declaration.
The Table 4 in the publication lists the counties in all the Midwest disaster states where the provisions apply.
Finally, the 4684 instructions state the following: “New rules apply to losses of personal use property attributable to tax years beginning after 2007 and occurred before 2010.” (Reminder: Two forms of Disaster legislation went into effect last October 2008 - National Disaster Provisions and the Midwest Disaster Provisions)

Note: Please do not confuse the two laws. Disasters that occurred after the Midwest Disaster area
time frame or in other parts of the nation would follow the above two provisions. But they are not
available for the Midwest Disaster. IRS is looking for and catching those who try to take the casualty
loss in the Midwest Disaster area without itemizing.

Miscellaneous

Question: What form will be used for non-itemizers that have deductions associated with disasters, real estate taxes and vehicle sales tax deductions?

Answer: The new Schedule L will be used for disaster, real estate taxes and the vehicle sales tax deductions if a person does not itemize. It will also be e-filable.