Dear Benny: I’m a clinical psychologist and have run into this nightmare scenario several times:
1) The 18-year-old is not as frugal as her parents and runs up debt or gets in trouble with the Internal Revenue Service. Their house is one of her assets.
2) She marries and then divorces at some time in the future. Her share of the house is one of the assets she brings into the marriage.
3) She has a falling out with her parents and wants to have her share now; she can file for partition, forcing them to either buy her out or sell their house.
4) They may want to sell the house a few years from now. They will need her signature. She may not think the sale is “good for them.”
She may not like her widowed mother’s new boyfriend, or doesn’t want them to sell and move to Florida, or she wants to live in the house, etc. She will have tax consequences she won’t like.
Parents never expect any of these things to happen, but, unfortunately, they do. Times and situations change in ways that people never expect. –Name withheld for privacy purposes
Dear anonymous: I have long taken the position that – for legal and tax reasons – it is not a good idea for parents to put their children on title to the family home. Your analysis provides a different dimension in support of my opinion.
Dear Benny: I am in the process of preparing my 2010 income tax return and bought my first home last year. How is the first-time homebuyer tax credit reflected on the tax return? –Tim
Dear Tim: To be eligible for the first-time homebuyer tax credit, you had to enter into a binding real estate sales contract on or before April 30, 2010, and must have closed (gone to settlement or escrow) on or before Sept. 30, 2010.
Although the IRS is encouraging taxpayers to file their tax returns electronically, because of the documentation required for claiming this credit you must file a paper return. Attach Form 5405, “First-Time Homebuyer Credit and Repayment of Credit.” You must also enclose a properly signed settlement statement (known as the HUD-1) that was used for the purchase.
There has been a lot of fraud involving tax filers on this issue. Indeed, one taxpayer claimed that his underage son was the property buyer. Accordingly, the IRS is looking very carefully at all tax returns that claim this credit, which is why they are insisting on a paper — not an electronic — filing.
You can get a lot of helpful information from the IRS website, irs.gov.
One important suggestion for military people: In December 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 became law.
If you are a member of any of the uniformed armed services — or in the foreign service — and served on official extended duty service outside of the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010, you have an extra year in which to buy a principal residence and take advantage of the first-time homebuyer credit.
You have to enter into a binding real estate sales contract on or before April 30, 2011, and close (settle or go to escrow) by June 30, 2011.
Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to email@example.com.