Homebuyer Credit
Total Views: 448
Here's a question just for me. My son and DIL have fallen in love with a house, and they're planning to put a contract on it next week. It's a bargain and won't remain on the market for long.
DIL qualifies as a first-time homebuyer, but my son sold his previous home in October of 2006. I have a professional realtor client/friend who is willing to buy the house and rent it to the kids until my son's three years is up, then sell it to them with no commission. Y'all think this would fly?
Solved!
Helpful Answer
I am in agreement with everybody else in saying that from a practical perspective, "I think it would fly". Even so, I am going to include a little bit of technical analysis because I feel it could bring up a couple of interesting legal issues.
From a technical perspective the IRS could theoretically (if they cared enough to do it) try to use the Substance Over Form doctrine to collapse the sale of the house from the original seller to the realtor and then to your kids into a sale of the property from the original seller to your kids, but even so, the IRS has not always been successful in trying to do this (See William P. DOYLE and Crystal Gibson Doyle, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, and COTTAGE SAVINGS ASSOCIATION v. COMMISSIONER OF INTERNAL REVENUE 286 F.2d 654; 1961 for a couple of examples) and the fact that the realtor is a nonrelated party and that taxpayers are generally allowed to structure their transactions in such a way as to maximize tax benefits (with exceptions) could make it more difficult for the IRS to do this.
Lets assume the worst case scenario (which I feel is unlikely) that the IRS disallowed the credit as a result of collapsing the transactions. The question then remains as to when the sale of the property to your kids took place? Generally the courts have found that a sale takes place when the "benefits and burdens" of ownership have passed from the buyer to the seller (Numerous court cases have used this term. See: COMMISSIONER OF INTERNAL REVENUE v. SEGALL 114 F.2d 706; 1940 U.S. App., for a good example of a court determining when a sale took place). Facts and considerations to be taken into account would include an unconditional right to the property and who is using it.
Assuming there is no written agreement between the realtor and your kids to sell the property to them, and that the realtor states that he has no obligation to sell the property to them, then the children may be able to argue that the Statute of Frauds would make it impossible for them to force the realtor to sell them the property and as a result the sale to them did not take place until the realtor sold it to them.
I believe it is technically possible that the IRS could collapse the transaction as a sale between the original owner and your kids, but still have the sale take place at a late enough time for your son to qualifiy for the credit. Most of what I wrote here was mostly off the cuff (except pulling up the legal cases) and I wonder what other people think about this. Any comments.
Answer
the only thing I would recommend is that possibly they rent it until November , this would make sure there is not a question re the 3 year rule
Answer
Sounds like son owes dad some money for tax planning.
Answer
As long as your "professional realtor client/friend " is not related to your son or DIL, then I go with "buy it in Nov."
Solved!
I am in agreement with everybody else in saying that from a practical perspective, "I think it would fly". Even so, I am going to include a little bit of technical analysis because I feel it could bring up a couple of interesting legal issues.
From a technical perspective the IRS could theoretically (if they cared enough to do it) try to use the Substance Over Form doctrine to collapse the sale of the house from the original seller to the realtor and then to your kids into a sale of the property from the original seller to your kids, but even so, the IRS has not always been successful in trying to do this (See William P. DOYLE and Crystal Gibson Doyle, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, and COTTAGE SAVINGS ASSOCIATION v. COMMISSIONER OF INTERNAL REVENUE 286 F.2d 654; 1961 for a couple of examples) and the fact that the realtor is a nonrelated party and that taxpayers are generally allowed to structure their transactions in such a way as to maximize tax benefits (with exceptions) could make it more difficult for the IRS to do this.
Lets assume the worst case scenario (which I feel is unlikely) that the IRS disallowed the credit as a result of collapsing the transactions. The question then remains as to when the sale of the property to your kids took place? Generally the courts have found that a sale takes place when the "benefits and burdens" of ownership have passed from the buyer to the seller (Numerous court cases have used this term. See: COMMISSIONER OF INTERNAL REVENUE v. SEGALL 114 F.2d 706; 1940 U.S. App., for a good example of a court determining when a sale took place). Facts and considerations to be taken into account would include an unconditional right to the property and who is using it.
Assuming there is no written agreement between the realtor and your kids to sell the property to them, and that the realtor states that he has no obligation to sell the property to them, then the children may be able to argue that the Statute of Frauds would make it impossible for them to force the realtor to sell them the property and as a result the sale to them did not take place until the realtor sold it to them.
I believe it is technically possible that the IRS could collapse the transaction as a sale between the original owner and your kids, but still have the sale take place at a late enough time for your son to qualifiy for the credit. Most of what I wrote here was mostly off the cuff (except pulling up the legal cases) and I wonder what other people think about this. Any comments.
Answer
Thanks, BGTS, that's great stuff. I had considered the form vs. substance issue (briefly), and decided that if that's all I have to worry about, especially with the third party involved, it's worth a shot. I hadn't even considered that the incidents of ownership not passing might protect them anyway. I'll write you from Leavenworth and let you know how the deal went down.
Comment
No relation, AM. I think we'll go for it. I appreciate you guys.