1st Time Homebuyer Credit

[GraceNY]

My question relates to the following:

36©(3) Purchase

(A) IN GENERAL -- The term "purchase" means any acquisition, but only if -

(i) the property is not acquired from a person related to the person acquiring such property, and

(ii) the basis of the property in the hands of the person acquiring such property is not determined --

(I) in whole or in part by reference to the adjusted basis of such property in the hands of the

person from whom acquired, or

(II) under section 1014(a) (relating to property acquired from a decedent).

How do you interpret this provision? (1) Purchases from related parties do not qualify as purchases eligible for the tax credit if either of the basis provisions in § 36©(3)(A)(ii) applies, but could qualify if purchased from a related party at full FMV. (2) Any purchase from a related party is unqualified and that any purchase, even if not from a related party, is unqualified if either of the basis provisions applies.

The instructions for F-5405, which is used to claim the FTHC, advise taxpayers, "You cannot claim the credit if .... 7. You acquired your home by gift or inheritance. 8. You acquired your home from a related person."

Considering the above referenced §36©(3), please comment on the following:

TP & Spouse are first-time homebuyers. They are purchasing a house that is owned 50% by "Jim, John & Joe" and 50% by Aunt, Jane. One of the sellers, Jim, is TP's brother-in-law ("Jim" is married to TP's sister). This does NOT fall under the "related-person" restriction as "related party" definition in this provision does NOT include in-laws...only spouse, ancestors or lineal descendants. However, as part of the purchase agreement and in agreement with the bank, "Jim, John & Joe" along with Aunt, Jane" are utilizing what is called a "gift of equity" so that the TP does not have to come up with a down payment. This strategy was not devised by the parties themselves, but rather by an attorney. Would you say that the "gift of equity" disallows the FTHC?

My understanding of the sale is that the gross sales price is $155,000, the GOE is $15,000 and therefore the amount due the seller would be $140,000.

Would the basis of the purchased home in the hands of the TP & Spouse be governed by Regulation Section 1.1015-4(a) which has to do with transfers in part a gift and in part a sale? Then if the TP takes the seller's basis in the property, there would be a problem.

I don't see how this GOE would invalidate the FTHC unless both of the following exist: (A) The amount realized by the seller is less than the FMV of the property AND ( the net amount paid by the buyer is less than the seller's basis. Therefore, the buyer's basis would be the amount paid for the property and satisfy the "purchase" requirement of Sec 36.

In my reading and research, I've also seen discussion of "sellers downpayment assistsance, "sellers closing cost assistance" and even the so-called "seller concessions" (which are very common today considering the R/E market) wherein some say that "any of the aformentioned will disqualify the transaction for purposes of the FTHC", but without any authoritative cites. Others have commented that "any gifts from the seller will invalidate the purchase for the purposes of the credit."

Your input/perspective would be greatly appreciated.

Grace

[kcjenkins]

How do you interpret this provision? (1) Purchases from related parties do not qualify as purchases eligible for the tax credit if either of the basis provisions in § 36©(3)(A)(ii) applies, but could qualify if purchased from a related party at full FMV.

(2) Any purchase from a related party is unqualified and that any purchase, even if not from a related party, is unqualified if either of the basis provisions applies.

#2 is the correct reading. Note the bolded words.

36©(3) Purchase

(A) IN GENERAL -- The term "purchase" means any acquisition, but only if -

(i) the property is not acquired from a person related to the person acquiring such property, and

(ii) the basis of the property in the hands of the person acquiring such property is not determined --

(I) in whole or in part by reference to the adjusted basis of such property in the hands of the person from whom acquired, or

(II) under section 1014(a) (relating to property acquired from a decedent).