Death of 1st Time Home Buyer

[tkamba]

I have a taxpayer who is preparing the taxes for her deceased mother who just purchased a home in 9/09. Her mother was planning on doing her taxes herself but did not do it yet because she was not feeling well. She passed unexpectedly a couple of weeks ago. Her mother qualified for the 1st time home buyer credit which would come in handy now that she needs to pay the mortgage until it sells. I am not finding anything in the instructions that say the daughter could not file for the mother under a POA to claim the credit. If the mother filed the day before she passed their would not be a question but since the daughter knows that the mother will not be living in the home long-term, would it be dishonest for her to claim the credit? I am not even seeing a residency requirement to claim this credit since it changed from a loan to a gift. Any ideas?

[kcjenkins]

Someone who dies is treated as if they lived there the rest of the year. Yes, Mom would qualify, as long as she would have qualified if she had lived out the year.

[jainen]

>>the daughter could not file for the mother under a POA<<

In my opinion, the daughter can NOT use a Power of Attorney to file the decedent's return. I think her POA is now void for all purposes. I think the tax return can only be filed by the executor or personal representative acting as such and following IRS instructions to verify the authority. Nor, in my opinion, can the daughter "claim the credit;" it goes to the estate. And I'm very uncomfortable about the closing revelation in the original post that "it changed from a loan to a gift." Perhaps that is just worded wrong, but to me it sounds like something that might not qualify for the credit.

[Pacun]

Someone who dies is treated as if they lived there the rest of the year. Yes, Mom would qualify, as long as she would have qualified if she had lived out the year.

I agree with KC that she lived the whole year and therefore qualify for 8K. The question is: Will she have to return the 8K since she didn't live in the house for 3 years?

[tkamba]

Jainen - I meant a loan from our government to a gift from our government. Not any gift among the family. I as a taxpayer am very uncomfortable with our government giving away such large sums of money but I do not make the rules, I just live by them.

I do not think the 3 year residency would apply since she did not plan on dying so it is of no fault of her own that she is not living there for 3 years, just like military or divorced couples.

[jainen]

>>I as a taxpayer am very uncomfortable with our government giving away such large sums of money<<

In order to get this $8000 "gift," the taxpayer must spend at least ten times that much, with most houses costing thirty or forty times as much. And that expense also covers the broker's commission, which at 6% will likely be upwards of $15000 just for that one thing. And the broker pays 25% of that in tax, and whatever else he spends it on generates even more taxes and so on down the line. Same thing with the seller's proceeds. The idea is that this big injection of money into the economy pulls in far more in taxes than it pays out.

In some ways this is similar to the old Republican argument that cutting taxes lets people have more to spend, but that is flawed in that the government was going to plow the taxes back into the economy just the same. With homebuying, NEW money is created because the banks are allowed to write loans far in excess of their actual reserves.

[JohnH]

So the accelerator & multiplier effect only works with housing.

Interesting economic theory there - giveaways good/tax cuts bad.

Since it's NEW money and it's being CREATED, why ever have an end to such a magic program?

Seems like we ought to just keep creating this new money indefinitely.

[jainen]

>>we ought to just keep creating this new money indefinitely<<

It pretty much looks like that's the plan, don't you think? Pretty much the only plan?

As to multiplier effect, it is always chugging away. But in my opinion it works about the same whether I buy a car or I give the money to the government and they buy a car (though I would of course prefer to choose myself). The problem is that I can only give the government some part of my limited earnings, that I actually have.

With homebuying, I can prime the multiplier pump with hundreds of thousands of dollars that never even existed until the bank wrote the check. That's because the banks only have to hold 10% in reserve. Some people think that means if the bank gets a million dollars in deposits, they can lend out $900,000. But bankers think it means that if they get a million dollars in deposits, they can lend out TEN million. And so that's what they do.

[JohnH]

I see your logic, but I think the net effect of priming the multiplier pump with hundreds of thousand of dollars that never existed is precisely what caused the 2008 collapes. (Except the government manipulated the lending markets indirectly rather than via a direct subsidy). When it became painfully obvious that those dollars didn't exist, the economic system collapsed and the government had to create a situation where we pretend that they exist, even though they still don't. (We called this TARP, which I thought was appropriate since a tarp is a piece of fabric whose purpose is to cover something up)

I think what you left out of your car example is the free market (flawed though it is). You'll budget money to buy a car that serves your transportation & emotional needs and you'll try your best to negotiate a price that will leave you enough dollars for a wide-screen TV or a pizza when you leave the dealership. A bureaucrat will use your money to buy a car that meets all 1,000 requirements contained in his 50-page spec manual produced by a committee, even if it is funtionally useless, aesthetically ugly, and costs a fortune (just as long as it's "in the budget"). That is, unless he is expected to personally drive it, in which case he'll have it tricked out with all the latest gadgets & options, even if he never intends to use them.

I just don't buy into the idea that the government can meddle in the markets and produce a desirable result. It always produces distortions. Some are a nuisance, but others can lead us over the precipice.

[David1980]

In some ways this is similar to the old Republican argument that cutting taxes lets people have more to spend, but that is flawed in that the government was going to plow the taxes back into the economy just the same. With homebuying, NEW money is created because the banks are allowed to write loans far in excess of their actual reserves.

Of course the question with home buyers is does it really increase the purchase of homes. Obviously people aren't deciding to go homeless for lack of a tax credit for buying a home. So they're choosing to live somewhere. If that somewhere is already a home (perhaps rented) then all you're doing is moving them from home A to home B.

There would be some percentage of shared family homes - for example two families in 1 house where if one family decides to move to their own home you could then have 2 homes instead of 1. To some extent this also could happen with apartments. It's not exactly without losses though, as the apartment owner (and thus the mortgage holders for apartment owners) will lose out as apartments go vacant.

I'm not convinced the FTHBC is any more effective than other methods of injecting money into the economy, and it's really more about luxury than necessity (since people lived somewhere before moving to a new home). I'd rather the government inject money into the economy through government spending on health care reform or something seen more as a necessity rather than a luxury.

[TAXBILLY]

I posted this question on another forum and this is an answer given by Dave Fogel:

If she purchased the home in 2009, lived in it, then died, she qualifies for the credit and it is not recaptured. IRC §36(f) recaptures the credit, and IRC §36(f)(2) accelerates the recapture if the residence ceases to be the taxpayer's personal residence during the 36-month period following purchase. However, IRC §36(f)(4)(A) states that recapture doesn't apply "to any taxable year ending after the date of the taxpayer's death." What this means is that if she ceased using the residence during the 36-month period, which normally would result in recapture, but the cessation was due to her death, then there is no recapture.

taxbilly