Michael on March 26th, 2010
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Although Friday comes every week, Friday Q &A comes around only when someone submits a good question AND I have time to answer it.   Both happened this week, so here we go. Want to ask a question?  Click here for more information or simply email a question.

I plan on buying a  home from my parents that wasn’t their primary residence, it is a rental property. I understand that I wouldn’t be able to get the $8,000 credit because my parents owned the home. What if an unrelated person bought the home from my parents but doesn’t qualify for the First Time Home Buyer Credit, and then I purchased the home from them later to get the $8,000? Is there any restrictions on trying to get the credit this roundabout way?



Straightforward Answer: Sounds like fraud.

Detailed Explanation:

As you are aware, any home purchased from a close relative, a definiiton that includes a parent, disqualifies you from the first time home buyer tax credit.  Technically, what you are saying – have a parent sell it to someone else and then you buy it from that person – is possible.  There’s nothing remotely illegal about it. But if it’s done solely to get the credit?  Doesn’t pass the smell test?

Transactions that are entered into solely for the purpose of tax avoidance aren’t well-received by the IRS.  Surely, that won’t really surprise anyone. For tax geeks:

Transactions entered into solely for the purpose of tax avoidance, which lack any business purpose, are shams and without effect for Federal income tax purposes. Frank Lyon Co. v. United States, 435 U.S. 561 (1978); Knetsch v. United States, 364 U.S. 361 (1960). The leading case supporting the existence of a “sham transaction doctrine” is Gregory v. Helvering , 293 U.S. 465 (1935).

Furthermore, calculate the transaction costs – real estate commissions, recording fees, etc.  My guess such expenses will cost more than $8,000.  So don’t bother. Want the credit?  Buy a different house. Or buy your folks’ home and forget about the $8,000.

FYI, there are over a thousand comments on my other first time home buyer tax credit posts, many of them are of a Q & A nature.  You can check them out here:

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