Definition of First-time Homebuyer (Foreign Principal Residence?)

[Koss]

I’m going to start a new thread on this, and I’m going to try to address the arcane but interesting question of whether previous ownership of a principal residence outside the USA (within the applicable three-year window) would disqualify a buyer from claiming the credit.

I’m flattered that Gretel and Barb appear to be waiting for me to hold forth on this issue, but I don’t have a real answer.

I think the text of the code itself is ambiguous, and could be read in two different ways.

The IRS publications and instructions do little to clarify the question, and in any event, these documents are not controlling or authoritative. There is certainly no case law on this yet. I don’t know whether there are any Treasury Regulations or Internal Revenue Bulletins that address this question. The IRS issued some formal guidance on how to deal with multiple unmarried buyers when one buyer qualifies and the other doesn’t. But I haven’t seen anything about ownership of a principal residence outside the US.

This question has nothing to do with the “old homebuyer credit” versus the “new homebuyer credit.” The new law merely amended the previous credit, to increase the amount, remove the repayment provision, and extend the period during which homes can be purchased. Yes, there’s a little more to it than that, but the amendment didn’t change the core definition of the term first-time homebuyer.

So what IS the definition of a first-time homebuyer, anyway?

Here’s the relevant text of the law:

36(a) ALLOWANCE OF CREDIT. –
In the case of an individual who is a first-time homebuyer of a principal residence in the United States during a taxable year, there shall be allowed as a credit against the tax imposed by this subtitle for such taxable year an amount equal to 10 percent of the purchase price of the residence.

<snip>

36(c) DEFINITIONS. –

For purposes of this section –

36(c)(1) FIRST-TIME HOMEBUYER. --
The term "first-time homebuyer" means any individual if such individual (and if married, such individual's spouse) had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which this section applies.

36(c)(2) PRINCIPAL RESIDENCE. --
The term "principal residence" has the same meaning as when used in section 121.

Note that the only reference to the United States is in 36(a), which authorizes the credit. The formal definition of first-time homebuyer makes no mention of the location of any previously owned principal residence.

Principal residence is defined by reference to Code Section 121.

Section 121 is the exclusion of gain on the sale of your principal residence.

Curiously, Section 121 does not contain a formal definition of the term principal residence. To the extent that Section 121 defines the term, it does so indirectly, by providing criteria that determine whether one can exclude gain upon the sale. There is no reference to the location of the home. A principal residence outside the US appears to qualify for exclusion of gain if the criteria are met. If Section 121 defines the term at all, it is a complex definition with an awful lot of baggage, i.e, two years out five, etc., with some intricate changes that were recently enacted to close some loopholes involving rental property.

I can’t find anything in Section 121 that limits the definition of a principal residence to one in the US.

The text of the homebuyer credit law, cited above, in Section 36(a), says:

In the case of an individual who is a first-time homebuyer of a principal residence in the United States during a taxable year, there shall be allowed as a credit…

And the devil is in the details.

My degree is in linguistics, and I think like a lawyer. It is a word game.

The ambiguity lies in the scope of the phrase “in the United States.” In other words, what does this phrase modify? Does it modify only the term “principal residence,” or does it modify the entire expression “first-time homebuyer of a principal residence”?

There is no answer. It can be read two different ways:

Reading #1, in plain English, would be:

You get this credit if:

(i) you buy a principal residence that is located in the US, and

(ii) within the last three years, you have not owned a principal residence.

Reading #2, in plain English, would be:

You get this credit if:

(i) you buy a principal residence that is located in the US, and

(ii) within the last three years, you have not owned a principal residence in the US.

The courts may actually have some precedential rulings on how to deal with this sort of question. There may be some sort of default interpretation for this type of modifying phrase.

Some staffer in Congress oughta be shot over this. The ambiguity probably could have been eliminated if they had put a comma in the right place, or added one more sentence.

Here’s an interesting analogy, to a different type of law: drunk driving penalties. I’m making up this example out of whole cloth, but I know that some states actually have this type of law. Suppose the text of the law reads as follows:

Residential treatment, in lieu of incarceration, shall be offered to first-time violators in Kentucky. First-time violator means a person who has not been convicted of operation of a motor vehicle while intoxicated during the three-year period preceding conviction under this statute.

What is the scope of the phrase “in Kentucky”?

Does this law mean:

You can choose residential treatment instead of jail time if:

(i) you are convicted of drunk driving in Kentucky, and

(ii) within the last three years, you have not been convicted of drunk driving in Kentucky.

Or does it mean:

You can choose residential treatment instead of jail time if:

(i) you are convicted of drunk driving in Kentucky, and

(ii) within the last three years, you have not been convicted of drunk driving.

When writing this type of law, our state legislators usually have the good sense to put in a couple extra lines, to clarify that what they mean is that you are only a first offender if you haven’t been convicted of violating the Kentucky drunk driving statute or any similar statute of any other state.

But would that include convictions in a foreign country?



LMAO


BMK

[Koss]

By the way...

I haven't been convicted of drunk driving within the last three years in Kentucky.



Maybe I could have come up with a less complicated example. Back in graduate school, we worked with sentences like this one:

The boys sang and the girls danced in the garden.

Were the boys singing in the garden?

BMK

[Gretel]

Wow, thanks a million Burton. I agree that the law can be read either way. I like your example of drunk driving. That actually strengthened my point that ownership outside the US does not count for this credit because, in general, the US does often not accept what happens in other countries.

I am a legal resident and just recalled two things, which made the time after my immigration very difficult.

1. My credit history outside of the US was not worth a penny. It's definitively better to have a bad credit history than none.
2. I am a certified accountant in my home country, but no matter how good your education is, it is worth nothing when you immigrate.

Not that I owned a house before but I will - until some regulations to the contrary are out - use the first-time homeowners credit to the advantage of any client who owned or owns a house in a foreign country.

[BOB W]

I think it is very clear.... The credit will only apply if the home is purchased in the US. The other part, principle residence within the 3 year period, means anywhere, just as written.

To imply that an "out of the US" residence is excluded from any rule is reading into the the law an issue that does not exist. Any residence means any residence. Pretty straight forward.

Maybe Congress wants ALL overseas US citizens to return home and buy a house with no FTHB restrictions???? I don't think so.

Would I allow a client to claim the credit when they move back to the US and buy a home after they sold a principle residence outside the US, No.............. Would you?????

[Koss]

Language Games

Gretel, I think I recall from an earlier post that you are originally from Germany...

One of my professors, who was from Switzerland, once remarked that German grammar is so complicated, and the sentences can be so looooong, that by the time you get to the end of the sentence, you may not remember what the subject was.



BMK

[Gretel]

That might be true but as opposed to the tax law, the German language uses a lot of commas to hang on to.

[David1980]

Reading #1, in plain English, would be:

You get this credit if:

(i) you buy a principal residence that is located in the US, and

(ii) within the last three years, you have not owned a principal residence.

This is how I read it. Although I can see some ambiguity in the "In the case of an individual who is a first-time homebuyer of a principal residence in the United States during a taxable year" the "The term "first-time homebuyer" means any individual if such individual (and if married, such individual's spouse) had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence to which this section applies." to me shows that #1 reading is more supported than #2 reading.

I think in order to argue for #2 reading you have to claim that 36(c)(1) is missing information. Where as for reading #1 it is what it says, nothing missing, just not spelled out in plain English.

[BP.]

Would I allow a client to claim the credit when they move back to the US and buy a home after they sold a principle residence outside the US, No.............. Would you?????

Think I'm with you on this one, Bob. I would not.

Burton, love reading your analyses; thanks for taking the time.

Fun topic!

[Gene V]

I think I found the answer

Reading from the IRS Question and Answers:

http://www.irs.gov/newsroom/article/0,,id=206291,00.html

Q. Would I be considered a first time homebuyer if I owned a principle residence outside of the United States within the previous three years?

A. Yes. A taxpayer who owned a principal residence outside of the United States within the last three years is not disqualified from taking the credit for a purchase within the United States.

[erchess]

Gene

Reading from the IRS Question and Answers:

http://www.irs.gov/newsroom/article/0,,id=206291,00.html

Q. Would I be considered a first time homebuyer if I owned a principle residence outside of the United States within the previous three years?

A. Yes. A taxpayer who owned a principal residence outside of the United States within the last three years is not disqualified from taking the credit for a purchase within the United States.

When we guide our clients we need to guide them according to sources that are controlling and authoritative. I will leave it to someone more knowledgeable than I to explain what these terms mean but your quote, like much of what the IRS puts out, does not measure up. Examples of what do measure up are the tax code, court decisions especially those of the Tax Court and the US Supreme Court, Revenue Rulings Revenue Procedures, Private Letter Rulings and legislative history. A client who lost the credit on audit after he or we relied on your quote could probably get the penalty against himself abated and there would most likely not be a penalty against the professional if any but there would be no such thing as going "But you said here" and automatically keeping the credit.

[Bees Knees]

Congressional Intent Defines The Term

The IRS Website may not be much of an authority on a subject, but the Joint Committee on Taxation Technical Explanation of the Law is. In fact, often courts will refer to the committee reports when the code is not clear. Thus, in this particular case, I think the committee report answers the question once and for all.

Nice try, Burton, on trying to interpret the meaning of the words of the law. But your conclusion is wrong. The Joint Committee Report says the following:

http://www.thetaxbook.com/updates/thetaxauthority_update_service/pdf/govdocs/tech_pl110-289.pdf

A taxpayer is considered a first-time homebuyer if such individual had no ownership interest in a principal residence in the United States during the 3-year period prior to the purchase of the home to which the credit applies.

Clearly, it was Congressional intent to apply this credit to taxpayers purchasing homes in the United States who had not previously owned a home in the United States during the last 3-years. Thus, a home owned in a foreign country is irrelevant.

[New York Enrolled Agent]

The IRS Website may not be much of an authority on a subject, but the Joint Committee on Taxation Technical Explanation of the Law is. In fact, often courts will refer to the committee reports when the code is not clear. Thus, in this particular case, I think the committee report answers the question once and for all.

Nice try, Burton, on trying to interpret the meaning of the words of the law. But your conclusion is wrong. The Joint Committee Report says the following:

http://www.thetaxbook.com/updates/thetaxauthority_update_service/pdf/govdocs/tech_pl110-289.pdf

Clearly, it was Congressional intent to apply this credit to taxpayers purchasing homes in the United States who had not previously owned a home in the United States during the last 3-years. Thus, a home owned in a foreign country is irrelevant.

Bees

While I don't disagree with your conclusion, isn't the cite from the JCT for the "old" pay-back $7,500 credit? §36 was changed since that time.

[solomon]

Bees

While I don't disagree with your conclusion, isn't the cite from the JCT for the "old" pay-back $7,500 credit? §36 was changed since that time.

Here are the changes included in PL 111-5 or HR 1

SEC. 1006. EXTENSION OF AND INCREASE IN FIRST-TIME HOMEBUYER CREDIT; WAIVER OF REQUIREMENT TO REPAY.

(a) Extension-

(1) IN GENERAL- Section 36(h) is amended by striking `July 1, 2009' and inserting `December 1, 2009'.

(2) CONFORMING AMENDMENT- Section 36(g) is amended by striking `July 1, 2009' and inserting `December 1, 2009'.

(b) Increase-

(1) IN GENERAL- Section 36(b) is amended by striking `$7,500' each place it appears and inserting `$8,000'.

(2) CONFORMING AMENDMENT- Section 36(b)(1)(B) is amended by striking `$3,750' and inserting `$4,000'.

(c) Waiver of Recapture-

(1) IN GENERAL- Paragraph (4) of section 36(f) is amended by adding at the end the following new subparagraph:

`(D) WAIVER OF RECAPTURE FOR PURCHASES IN 2009- In the case of any credit allowed with respect to the purchase of a principal residence after December 31, 2008, and before December 1, 2009--

`(i) paragraph (1) shall not apply, and

`(ii) paragraph (2) shall apply only if the disposition or cessation described in paragraph (2) with respect to such residence occurs during the 36-month period beginning on the date of the purchase of such residence by the taxpayer.'.

(2) CONFORMING AMENDMENT- Subsection (g) of section 36 is amended by striking `subsection (c)' and inserting `subsections (c) and (f)(4)(D)'.

(d) Coordination With First-Time Homebuyer Credit for District of Columbia-

(1) IN GENERAL- Subsection (e) of section 1400C is amended by adding at the end the following new paragraph:

`(4) COORDINATION WITH NATIONAL FIRST-TIME HOMEBUYERS CREDIT- No credit shall be allowed under this section to any taxpayer with respect to the purchase of a residence after December 31, 2008, and before December 1, 2009, if a credit under section 36 is allowable to such taxpayer (or the taxpayer's spouse) with respect to such purchase.'.

(2) CONFORMING AMENDMENT- Section 36(d) is amended by striking paragraph (1).

(e) Removal of Prohibition on Financing by Mortgage Revenue Bonds- Section 36(d), as amended by subsection (c)(2), is amended by striking paragraph (2) and by redesignating paragraphs (3) and (4) as paragraphs (1) and (2), respectively.

(f) Effective Date- The amendments made by this section shall apply to residences purchased after December 31, 2008.

Note that no amendments were made to the point in question - namely, ownership outside of the U.S. is not a disqualification.

From the JCT on the R & R Act: (HR 1)

It affirms the intent of the original law when it states the following:

A taxpayer is considered a first-time homebuyer if such individual had no ownership
interest in a principal residence in the United States during the 3-year period prior to the
purchase of the home to which the credit applies.

[New York Enrolled Agent]

Here are the changes included in PL 111-5 or HR 1



Note that no amendments were made to the point in question - namely, ownership outside of the U.S. is not a disqualification.

Thanks Solomon - as you noted found the content in JCX-10-09. I concur that Bees cite applies to the new law also.

A taxpayer is considered a first-time homebuyer if such individual had no ownership interest in a principal residence in the United States during the 3-year period prior to the purchase of the home to which the credit applies.