Taxing Lessons Case Summaries

Case — First-Time Homebuyer Credit

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TL Case Summ


Does the purchase of a home by the guardian of a relative qualify for the first-time homebuyer credit?


Taxpayer Says: He purchased the home personally from his ward’s parents, then sold it to himself in his capacity as guardian. The related party rules do not apply, and the ward is eligible for the credit.

Internal Revenue Service Says: The initial purchase lacks economic substance and can be disregarded, meaning the ward purchased the home directly from his parents. The related party rules do not apply, and the credit is disallowed.


From Internal Revenue Code Section 36(a) and (b): Generally allows a credit of up to $8,000 to a first-time homebuyer of a principal residence in the United States.

From Internal Revenue Code Section 36(c)(3) and 36(c)(5): The credit is not available to a taxpayer who purchases a home from a related person. Related persons include direct ancestors such as parents.


If you bought a home to use as your personal residence during 2008, 2009 and part of 2010, and you were a qualifying “first-time homebuyer,” you might have been eligible for a refundable federal tax credit. For purposes of the credit, you’re a first-time homebuyer if you haven’t owned a primary residence during the three years prior to buying your new home. The amount of the credit and the rules you have to follow to claim it vary depending on the year you bought your home. Among other requirements, the credit is not allowed when you purchase the home from a relative, including your spouse, parent, grandparent, child or grandchild.

In this case, the taxpayer, a Certified Public Accountant, is the guardian of a physically and mentally handicapped ward. When the ward’s parents got into financial difficulty during 2009, the taxpayer personally purchased their home, where they lived with his ward. Seven days later, with permission from the probate court, he sold the home to himself in his capacity as guardian, using the ward’s funds. When he filed the 2008 federal income tax return for his ward, he claimed the first-time homebuyer credit on the purchase. Because he was not related to the ward’s parents, either personally or in connection with his guardianship, he believed the related party rules did not apply.

The IRS says the structure of the purchase lacks economic substance. In effect, when the transaction is collapsed into its true substance, the taxpayer’s ward purchased the home from his parents and he is not eligible for the first-time homebuyer credit because of the related party restriction.


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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit and

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For the IRS. The taxpayer was a mere “conduit through which to pass title” from his ward’s parents to his ward. Thus, we disregard the intermediate transfer of title to the taxpayer in his individual capacity and instead compress the transaction into a single event, which was a purchase by the taxpayer’s ward from the ward’s parents. In other words, the taxpayer structured the form of the transaction in an attempt to qualify his ward for the credit, but the true substance of the transaction was a purchase from related persons. Because the ward purchased the home from related persons, he is not entitled to the credit. (Editorial note: In this case, the ward was a minor, but the transactions took effect before the tax law was changed to prohibit purchases by buyers under age 18.)