Q: My sisters and I recently inherited our mother’s house. The sister that is executor of the will also wants to buy the house. The house has to be taken out of Mom’s name before it can be sold, and the bank wants to put it in my sister’s name. That way she would refinance the house to pay us off.
She would like to take advantage of the $8,000 first-time home buyer tax credit, because she hasn’t bought a house yet. But if she refinances instead of buying the home, she can’t.
Is there a way for her to get a loan and then buy the house using the 1st time home buyer tax credit? Thanks for your time.
A: There are some IRS rules regarding the “purchase” of a home that is being inherited from an estate. But your question raised other interesting tax issues including your question on the $8,000 first time home buyer tax credit, so I tapped the knowledge of Bill Nemeth, an enrolled agent based in Atlanta.
Nemeth started by noting that your sister (who is the executor of your mom’s estate) is a part-owner of the home, since she inherited a portion of the home along with her siblings.
“The traditional way to view the inheritance of her mom’s house is to call it investment property, as there is no intent to have anyone of the sisters inheriting the home use it as her principal residence,” Nemeth explained.
When real estate is inherited, the cost “basis” in the property becomes the “fair market value on the date of the owner’s death or at any time within 6 months after the owner’s death. “The executor gets to pick the better date,” Nemeth added.
If the home is sold to anyone other than the siblings, the IRS treats the sale as a sale of investment property. Since there is typically selling costs involved, all parties that own the home would have a slight long-term tax loss, but would wind up with cash in pocket, he said.
For example, let’s assume the mom purchased the home 10 years ago for $100,000 and let’s assume there are three sisters involved. If the home sells for $150,000, with selling costs of $15,000 (commission and transfer taxes), the sisters walk away from the sale with $135,000, or about $45,000 each.
On each sister’s tax return (Schedule D), the sale of the home would be listed as a sale of an inherited house (all inherited property becomes a “long-term” investment as opposed to a “short term” investment for tax purposes). The cost of the home attributed to each sister would be $55,000 (one-third of $150,000 plus one-third of the $15,000 in costs to sell the home). Each sister’s share of the sales price would be $50,000 (one-third of $150,000) and each sister’s share of the cost to sell the home would be $5,000.
If they inherited the home valued at $150,000 but paid $15,000 in expenses to sell it, each sister would have a loss on the sale equal to their share of the costs to sell the home or $5,000 (each sister’s cost basis of $55,000 and the actual sales price of the home shared by the sisters of $50,000).
Nemeth said he would advise sister to include a “statement” on her federal income tax return describing exactly what happened. This lets the IRS know that the Social Security number of the first sister on the 1099-S Sale of Home of $150,000 would not be reporting the entire transaction but only her share.
If one of the sisters wants to purchase the home from the other two and use it as her principal residence, Nemeth said the IRS would treat this transaction as a sister buying an investment property from herself (and her two sisters) to use as her principal residence.
According to IRS Form 5405 (the form used to claim your $8,000 first time home buyer tax credit), acquiring your home from a related person disqualifies you from claiming the $8,000 first time home buyer tax credit. You are also disqualified from obtaining the first time home buyer tax credit if you acquire your home by gift or inheritance or you acquire your home from a related person, including your parents, children or siblings.
Nemeth said he doesn’t believe that the executor sister will qualify for the $8,000 first time home buyer tax credit, but there is nothing standing in her way from buying the two-thirds of the property that she did not inherit.
If you’re not sure whether you qualify for the $8,000 first time home buyer tax credit, you can call the IRS directly (toll free 800-829-1040) and get an opinion from the tax section. Nemeth said that you should ask to speak to an IRS tax attorney.
If you get an answer you like, create a paper trail: write down the employee’s name and ID number, as well as the time and place of the call (especially where the employee is located).
“If the advice ever results in an audit, the IRS policy is to forgo any penalties and just collect the tax due since the taxpayer’s action was based on IRS advice,” Nemeth notes.
You should also know that you might get conflicting answers from some of the IRS representatives who take taxpayers’ calls. Be careful when asking your questions and be specific about the details of your situation.