$8000 tax credit available for someone who inherited property?

I have a client that is purchasing a house via a lease option with me. She should close with financing before Dec 1, when the $8000 tax credit expires. Problem: She hasn’t owned a home other than one she inherited from her sister about 2 years ago (free and clear). Lets say my client is Mary Jones and the sister is Jane Smith. The title on the tax record reads that it is owned like this: Jane Smith c/o Mary Jones. She has been living in the house. Will she be eligible or will she be knocked out due to the home ownership rule of no prior home ownership in the previous 3 years?

Mary Jones is living in the house for which she is the beneficial owner. I would say Mary is not a first time home buyer.

However, it seems that the house has not been through probate or else Mary Jones would be the sole owner and named on the title.

Does Mary expect to sell this house? If so, how does she propose to do so without being on title.

The answer may lie in how the estate was administered. If there was no will, the property may have passed automatically to the sister on the other sister’s death.

If there was a will and she was the beneficiary, she wouldn’t own it officially until probate was complete and the executor of the estate deeded the property from the estate to the daughter. I bet she was named as the executrix of sister’s estate and never probated the will, so I’d argue she is not the owner of the house.

Have her close on your house before she probates the will and apply for the tax credit.


I don’t think it will be quite so simple. If the IRS challenges the tax return, their position will focus upon who had the benefits and burdens of ownership. If Mary has the responsibility to maintain the property, if Mary is the named insured on the hazard insurance policy, if Mary pays the property taxes when due, if Mary alone would benefit from the sale of the property then Mary might be considered the owner even though title had not formally tranferred.

I see this as a parallel to the case where a purchase on a contact for deed still qualifies for the tax credit even though title does not transfer to the buyer until the contract is satisfied. If the IRS will allow the first time homebuyer to claim the tax credit becvause he has all the burdens and benfits of ownership even though the buyer does not have title, it seems logical that the IRS would deny first time homeowner status to someone who has all the benefits and burdens of ownership for their principal residence, even though title has not transferred.

Definitely a grey area, but the IRS could make a fairly strong argument to deny the first time homebuyer status because Mary enjoys the benefits and burdens of ownership of the property where she currently resides and would be the titled owner if she had taken the property through probate in a timely manner.