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IRS to take close look at those claiming first-time buyers tax credit

The government is willing to provide an $8,000 tax credit to most first-time home buyers, but those who want to claim the valuable tax break need to ensure that they meet all of the Internal Revenue Service's requirements first.

Q. My mother passed away earlier this year and I inherited her longtime home. Because I have never owned a house before, am I eligible for the $8,000 "first-time buyer" tax credit that you recently wrote about?

A. Sorry, but the answer is no. Rules of the new federal tax-credit program specifically prohibit consumers who inherit a property from claiming the credit, even if they have never owned a home before.

The credit is available to most buyers who purchase a house before Dec. 1, provided that neither they nor their spouse has owned a home for the past three years. The credit, however, is not available to single tax-filers who make more than $95,000 per year - even if they meet the three-year requirement - or to married couples who file their taxes jointly and whose adjusted gross income is more than $170,000.

The popularity of the new tax credit program has helped to spur home sales but, unfortunately, is also drawing keen interest from the Internal Revenue Service. The IRS is now scrutinizing claims for the credit, even if the tax return or claim is filed by an accountant or similar professional.

Case in point: Just a few weeks ago, a tax preparer in Florida entered a guilty plea on charges that he fraudulently submitted claims for the credit on behalf of 15 different clients. Most of them said they didn't understand the details of the program, but that they trusted the tax preparer to take care of it.

The accountant has been sentenced to three years in jail. His clients, meantime, can expect an audit letter from the IRS.

It's also important to note that you are not eligible for the credit if you purchase a home from someone whom the IRS deems a "related person" - including a spouse, parents, grandparents or your own offspring. Ditto for those who buy a house from a business or corporation in which they have at least a 51 percent stake, a small but fast-growing type of plan that can sometimes save buyers thousands of dollars in property taxes and reduce potential taxes on a resale.

Buyers who use state-sponsored bond programs that provide down-payment assistance or low-rate mortgages also usually are prohibited from taking the tax credit. That's because the IRS figures that buyers who use such programs are benefiting enough from taxpayer funds, so they shouldn't get a second or third tax break by also claiming the $8,000 federal credit for first-time purchasers.

Q. We have been thinking about selling our home and using part of our profit to buy a retirement home in a rural area. A seller in an area we like recently advertised that his property includes two acres of "airable" land. What does this term mean? I tried to look it up in the dictionary, but couldn't find it.

A. I get this question surprisingly often, perhaps because more people are reaching retirement age and selling their longtime home in urban or suburban areas and then using some of their resale profit to purchase a home in less-expensive rural communities.

Regardless of why you are planning to move, you couldn't find the term in your dictionary because the correct spelling is "arable."

An arable parcel is land that can be cultivated for farming. If you really want the place, be prepared to put on some overalls and buy a tractor - or at least a large shovel.

Q. I have a credit score of about 770, which FICO considers "good." I would like to buy my first home soon, but I am in the middle of a dispute with an auto dealership that sold me a "lemon" back in April. I made all my payments promptly until I returned the car to the dealer in July and demanded my initial deposit back. The dealer refused, and now says the company will turn over my account to a collection agency and report me to the credit bureaus if I don't pay an additional $625 in back payments and a $1,000 return fee within 15 days. If I refuse to pay, how will it impact my credit score and my ability to purchase a house?

A. Your credit score will undoubtedly drop if the auto dealer follows through on its threat to turn your account over to a collections agency. The amount of the decline will largely depend on the rest of your credit history, but even a relatively modest decrease could knock your score down to the point at which you'll have to pay a higher rate for your new mortgage.

Most lenders today use the FICO credit-scoring system, which was developed several years ago by California-based Fair Isaac Corp. Under FICO's latest scoring formula, collection accounts under $100 won't hurt a consumer's score, but the $1,625 that the auto dealer claims you owe is obviously far above that amount.

Your best option now would be to pay the $1,625, but attach a certified letter to the check stating that the payment is being made under protest. This should prevent the account from going to collections, protect your credit rating and thus allow you to obtain the lowest rate policy when you apply for a mortgage. You can then sue the car dealer in small claims court to have the money returned, plus reimbursement for any court costs or legal fees that you incur.

• For a copy of the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 2960, Culver City, CA 90231-2960

© 2009, Cowles Syndicate Inc.

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