Q: I understand the $8,000 first time home buyer tax credit program excludes house purchases made from a family member. Does that include a purchase made from a trust that has as its executor my father-in-law?
Here’s the short version of the story: My wife’s mother passed away last fall. My wife’s father has purchased a second home. My wife and I are purchasing the old home from a living trust set up in the name of my father-in-law. Would we be eligible for the $8000 credit if all other criteria are met? We are purchasing the home at fair market value.
A: You have a problem on your hands. The $8,000 first time home buyer tax credit program allows people who have not owned a home as a personal residence (if you owned a second home or an investment property you would still be considered a first time buyer) within the last three years to purchase a home and receive an $8,000 tax credit on their federal income taxes.
There are additional restrictions on this $8,000 first time home buyer tax credit, including an income restriction. The tax credit phases out if more than $75,000 (or $150,000 if you are married) and if you make more than $95,000 (or $170,000 if you are married) you lose out entirely on the first time home buyer tax credit.
Also, the tax credit is limited to 10 percent of the value of the home with a cap of $8,000. If you purchase a home that is worth less than $80,000, you won’t get the $8,000 benefit of the first time home buyer tax credit.
Now if you qualify on all of these issues, the IRS has thrown another curve ball for some homeowners. The IRS says that you can’t qualify for the $8,000 first time home buyer tax credit if you “buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.”
And here is where it gets tricky. You would be buying your home from a trust. But that trust owned your father-in-law’s and mother-in-law’s home. The IRS has certain rules regarding related parties and how they view corporations, companies, partnerships, and trusts. It’s most likely that the IRS would take the view that your intended home was owned by a close relative and therefore disqualify you from receiving the $8,000 first time home buyer tax credit.
Learn more about the income restrictions for the $8,000 first time home buyer tax credit and when you have to pay back the $8,000 first time home buyer tax credit