Court Denies Taxpayers’ Claim for First Time Home Buyer Credit

Foster v. Commissioner, 138 T.C. No. 4 (January 30, 2012)

In a decision issued today, the Tax Court held that a couple was not eligible for the First Time Home Buyer Credit (“FTHBC”) because they owned a present interest in a principal residence within three years prior to the date of purchase of their new home.

Francis and Maureen Foster (the “Fosters”) had originally purchased a home in Western Springs, Illinois in 1974 that was their principal residence (the “old house”).  However, in 2006 the Fosters began spending more time at the home of Mrs. Fosters’ parents in nearby La Grange Park, Illinois (the “parents’ house”).  Although they began spending more and more time at the parents’ house, the Fosters continued to maintain the old house, including receiving mail, maintaining utility services, and even frequently staying overnight in the old house.

The Fosters then sold the old house, finalizing the sale on the June 6, 2007.  For about the next two years, they rented an apartment.  On July 28, 2009, the Fosters purchased another house in Brookfield, Illinois (the “new house”).  The Fosters claimed the FTHBC on their 2008 return.

In order to claim the FTHBC, a taxpayer must be a “first-time homebuyer.”  IRC Section 36(c)(1) defines a first-time homebuyer as a taxpayer that had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the home for which the credit is claimed.

Therefore, in order to claim the FTHBC, the Fosters could not have had a present interest in a principal residence after July 27, 2006 and before July 28, 2009.  Despite the fact that the old house was not sold until June 6, 2007, the Fosters claimed that they had stopped using the old house as their principal residence in February 2006.

It isn’t clear what evidence the Fosters presented in an attempt to prove that they had stopped using the old house as their principal residence but, as mentioned above, the court noted that they continued to maintain the old house, used the address to receive mail, and maintained utilities.  The court also noted that the Fosters did not pay rent, or pay for utilities, at the parents’ house, which would arguably have been their principal residence once they stopped using the old house as their principal residence.

In looking to see where the Fosters went wrong, and what they might have done differently, the obvious response would have been to delay the purchase of the new house until more than three years from the closing of the old house.  If that wasn’t an option, the Fosters could also have taken steps to demonstrate that they had stopped using the old house as their principal residence, such as having their mail forwarded to the parents’ house, changing their addresses for license and voting purposes to the parents’ house, or even just making regular payments for rent and utilities at the parents’ house.  These things might seem obvious in hindsight, but the main point to take away from this case is that if you are claiming a credit (or a deduction for that matter) and there is a question as to whether you meet the requirements, you need to be sure that you can document and prove facts that support your eligibility for the credit.

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