Brother’s Purchase of Interest in Estate Home DQ’ed for Tax Credit

The U.S. Tax Court rejected a taxpayer’s claim for a first-time home buyer tax credit, concluding that the taxpayer purchased the home from a relative, so the transaction did not qualify for the credit. The court decided that the transaction was not one from sibling to sibling, which would have qualified, but rather from the executors of an estate to a beneficiary of the estate, which is disqualified under the law.

In the fall of 2008, Maria Lee Zampella passed away at the age of 91. In her will, she left her Middletown, NJ home to her two sons. The home had a fair market value of $430,000. One brother purchased the other brother’s interest in the home for $215,000, and took title to the residence.

On his 2008 tax return, the brother who assumed the title claimed the first-time home buyer credit. The credit applies to individual taxpayers who are first-time homebuyers. The home must be a principal residence in the United States, and the credit shall not exceed $8,000. The brother claimed the full $8,000 credit. The IRS disallowed the credit entirely, however, and sent the taxpayer a notice of deficiency. The homeowner sued.

The Commissioner argued that the taxpayer was not entitled to the credit because the home transaction was not a qualifying purchase under 26 USC 36. Section 36(c)(3)(A)(i) expressly excludes homes obtained from a relative of the purchaser. Under Section 36, a sibling relationship does not trigger the family exclusion, but “related persons generally include an executor of an estate and a beneficiary of such estate.”

The brother argued that the transaction qualified because, although he received a one-half interest in the home directly from the co-executors as a beneficiary of the estate, he purchased the remaining 50% interest directly from his brother, and this acquisition should qualify him for the deduction.

The court in Zampella v. Commissioner ruled against the taxpayer, deciding that the evidence clearly indicated a non-qualifying transaction. The court noted that both brothers were co-executors of their mother’s estate and that the deed to the home stated that the two brothers were acting in their capacities as co-executors when they transferred the residence to the purchasing brother. When they filed their HUD-1 Settlement Statement regarding the transaction, the brothers listed themselves, as “[c]oexecutors and beneficiaries of the Estate of Maria Lee Zampella” as the seller of the property. The taxpayer’s argument, the court concluded, “invites us to ignore his brother’s role as a coexecutor of the Estate for purposes of the” credit. The majority of the evidence in the case, however, clearly indicated that the purchase of the second one-half interest in the home was not one from one brother to another, but rather a sale transacted by the brothers acting in their capacities as co-executors of the estate.

The tax attorneys at Samuel C. Berger, P.C. and the CPAs at S.C. Berger, P.C. can help people throughout New York and northern New Jersey with federal income tax issues, including those wishing to realize the American dream of home ownership for the first time. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.

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