Managing the tax law is no different than installing hardwood, baking a casserole[i], or concocting an email that bilks the unwary by posing as the deposed prince of Nigeria: the devil is in the details.
Take, for example, the case of Francis[ii] and Maureen Foster.[iii] A well-intentioned couple, they believed they had met the statutory requirements of a straight-forward tax provision, but by mishandling some subtle non-tax housekeeping, they cost themselves $8,000.
In February 2006, the Foster’s put their home of 30 years on the market, though the property didn’t sell until June of 2007. During the 16 months between the initial listing and the subsequent sale, the Foster’s made several damaging administrative missteps:
- They moved in with Mrs.. Foster’s parents, but failed to pay rent or any portion of the utilities.
- Mrs. Foster renewed her driver’s license at the old address, rather than at her parent’s address.
- They used the old address on their 2005 tax return.
- During 2006 and 2007, the Fosters continued to visit the old home, where they maintained all utilities services, requently stayed overnight, and received mail.
- On a 2007 rental application, the Foster’s again listed the address of the old home as their primary residence.
In July 2009, the Foster’s purchased a new home and claimed the $8,000 first-time homebuyer’s credit on their tax return. The IRS disallowed the credit in full, arguing that the Foster’s failed to qualify as first-time homebuyers.
The Service based its position on I.R.C. § 36(c)(1), which defines a “first-time homebuyer” as any individual having no present ownership interest in a principal residence for three years prior to the date of purchase of a principal residence. The IRS argued that since the Foster’s hadn’t sold their previous primary residence until June 2007, a date only 2 years prior to the purchase of the new home, they failed to qualify for the credit.
The Fosters, to the contrary, argued that the ceased using the old home as a principal residence in February 2006 when they listed it for sale, and thus qualified for the credit as three years had passed prior to their purchase of the new home.
The Tax Court sided with the IRS, citing the damaging facts and circumstances bulleted above as evidence that the Foster’s continued to use their old home as their primary residence even after they moved out and until it was sold in 2007.
The takeaway lesson, quite obviously, is that paying attention to detail could have preserved the credit for the Fosters. Had they taken the steps necessary to distance themselves from their old home — by paying rent to Mrs. Foster’s parents, switching the address used for their licenses, tax returns, mail service, and rental applications to their temporary home and by cutting off any non-essential utilities and ceasing visitation at their old home — the Foster’s would likely be $8,000 wealthier today.
[i] Or so I’m told.
[iii] Foster v. Commissioner, 138 T.C. 4 (1.30.12)