Taxing Lessons From Court Decisions

Decisions — Principal Residence

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Image source: OpenClipArt.org
Image source: OpenClipArt.org

Sometimes it feels like questions about the first-time homebuyer credit will never go away. That’s especially true for early-adopters, for whom the credit amounted to an advance loan requiring repayment over fifteen years. (Here’s a chart of other repayment triggers, courtesy of the IRS.)

The credit, which was signed into law in 2009, ended in 2010. Though the rules changed several times, the general gist was you had to buy a home between 2008 and September 2010 (April 2011 for military and some federal employees) and meet other requirements to qualify. One of the requirements was that you had no present ownership interest in a principal residence during the three year period ending on the date of the purchase of the “principal residence” for which you claimed the credit.

Unfortunately, the details of obtaining the credit were less than clear, even to the IRS. The Treasury Inspector General for Tax Administration found the IRS improperly paid out millions in non-qualifying claims. The IRS eventually developed a comprehensive strategy for dealing with credit claims, and oversight later improved.

However, these cases still pop up in the tax court. The most recent is T.C. Memo. 2014-87 (Goralski). The taxpayer is a certified public accountant who inherited half of his mother’s house when she died in 2006. He lived in the house with his co-beneficiary until moving into an apartment in May 2007. In May 2008 he purchased a condo with his new wife, and claimed the first-time homebuyer credit.

Per income tax regulation 1.121-1(b)(2), whether you use a property as your “principal” residence depends upon all the facts and circumstances when you maintain more than one residence. Ordinarily, your principal residence (if you maintain more than one residence) is the property you use during most of the year.

The regulation lists other relevant factors that can help determine your principal residence.

In this case, after researching the rules, the taxpayer believed he was eligible for the credit because the facts and circumstances proved he did not intend to maintain his mother’s home as his principal residence.

The court sided with the IRS, saying facts and circumstances were not controlling in this case.

Taxing Lesson: Facts and circumstances: We’ll know ’em when we see ’em.

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In addition to the taxpayer’s use of the property, relevant factors in determining a taxpayer’s principal residence, include, but are not limited to-

(i) The taxpayer’s place of employment;

(ii) The principal place of abode of the taxpayer’s family members;

(iii) The address listed on the taxpayer’s federal and state tax returns, driver’s license, automobile registration, and voter registration card;

(iv) The taxpayer’s mailing address for bills and correspondence;

(v) The location of the taxpayer’s banks; and

(vi) The location of religious organizations and recreational clubs with which the taxpayer is affiliated.

Because there was no other residence, we need not engage in a facts and circumstances test in determining whether it was the taxpayer’s “principal” residence. A court cannot consider whether a residence is “most important, consequential, or influential” without comparing it to another residence. Therefore, regardless of whether the term “principal” is ambiguous, we need not decide that here because there was no residence with which to compare the home.

The taxpayer lived at the home and slept there during the relevant period. The taxpayer argues that he did not intend to remain there; however, there was no other place in which he could have resided or another residence to which to return. Regardless of how little time the taxpayer spent at the home or whether he intended to live elsewhere, he resided at the home and did not maintain any other residence during the relevant period. He had an ownership interest in the home when it was deeded to him and his sister in February 2007, and it was his only and thus his principal residence. Accordingly, he is not entitled to the FTHBC for 2008.

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