Home Buyer Tax Credit Rules On Buying From Family Members

Q: My mother-in law gave ownership of her house to her son (my brother-in-law) and my wife last year. She is in an assisted living facility and her attorney advised her to do it now if she wanted them to have it.

They are the only two children in the family and as my brother-in-law is a career military man, he and his wife did not want the house so my wife and I bought their half from them.

My question is do we qualify for any type of tax credit such as the $6,500 trade up. We sold our house for $125,000 and paid her brother one-half the value of the home, which was appraised at $160,000. We actually only paid $80,000 in cash and the other $80,000 was a gift from her mother.

Thanks for any advice you can provide.

A: According to the IRS, you cannot qualify for a tax credit if you are buying the home from close family members. The named “close family” members on the IRS website are parents, grandparents, children and grandchildren. Elsewhere on the IRS website, close family members refers to siblings as well as aunts and uncles.

But in the wacky world of these home buyer tax credits, there are been quiet tweaks to the code about issues that were perceived as being grossly unfair, such as the marriage penalty (where if one spouse owned a home but the other one never did, neither qualified for a first-time home buyer tax credit – a problem that appears to have been resolved).

Originally, you couldn’t get a home buyer tax credit if you bought a house from a sibling. But this rule seems to have been modified. The IRS is now telling people that siblings don’t count as “close family” members for purposes of the home buyer tax credit. As with many things relating to the IRS and the tax code, the rules seem to change frequently and what you sometimes think is fair turns out to not be available and things that seem unfair seem to be accepted by the IRS.

The best thing you can do is make sure you speak to a tax preparer for details. You must meet the other qualifications, including income and how long you lived in your other primary residence. You can read the rules at IRS.gov or check out HomeBuyerTaxCredit.com to see if you qualify.