Sad lesson learned

How one reader lost her tax credit but gained valuable experience

Money troubles can be the source of a lot of pain in a family. A reader wrote in with the following situation. It's kind of complicated, but very instructive. First her letter and then my response:

When my parents got divorced, my father looked to purchase a house with his settlement money. He found one but since he was unemployed at the time he was unable to get a loan for the remaining $25,000.00 to buy the house. My aunt had the money but would not lend it to him because she was worried about being paid back (she was smarter than I was) but she would loan the money to me. So I borrowed the money for him to purchase the house. Within 2 months my aunt found a house she wanted to purchase, so she asked me for the money back. My dad signed the house over to me as a gift and I took out an equity line to pay my aunt back. My dad then gradually borrowed more money from the equity line until it reached about $48,000. He made the equity line payments for the first few months then quit making payments. After making this payment on a house in my name that I didn't even consider my house, In 2007 I got fed up and told him I was putting the house back on the market. I was a full time student and could not afford to continue paying the monthly payment. He got upset and since he didn't have good credit he got his fiance to purchase the house in the amount of what was owed on the equity line plus what I had lent him and paid on the equity line payments over the past couple years. I did not make any profit on this home sale I was just paid back the money that I had lent him. Now I am purchasing my first home and was wondering if I would qualify for the $8,000.00 tax credit. I did not technically go through the purchasing process for my father's house. I sold it back to him (his fiance) in Dec. 2007 which is less than 3 yrs. ago. Will I still qualify for the tax credit???? Thank you for your time. - KC

Hi KC-

Thank you for your question. Unfortunately, I have some bad news for you. According to the IRS, first time homebuyers are "taxpayers who have not owned another principal residence at any time during the three years prior to the date of purchase." (My emphasis.)  Note that the IRS language says nothing about buying the home or even living in it. All that matters is that you owned it.

The "new and improved" version of the tax credit that was enacted last week might help you, though. The new version contains a provision for long-term home owners. Under this version, a homebuyer can get up to a $6,500 tax credit if she has owned a home for the past eight years and she has lived in it for at least five consecutive years during that eight year period. Depending on when your father gifted the home to you and whether you actually lived in it, you may be able to claim this tax credit.

The situation you describe illustrates another very important point: the moment you lend money to anyone close to you, you step on dangerous ground. I never lend money to family or friends. I might give them money, but I never, ever lend it. And that includes cosigning on a loan. Your aunt was smart to not lend your father the money, but she didn't do you any favors by lending it to you. In fact, I can't imagine why she would put you in the middle of this.

Also, what was this about your father being able to draw on a line of credit for a home you own? That's a serious problem. You've got to be a lot savvier if you want to hang on to your money in life. I love your father and you want to be a dutiful daughter. That is very commendable. But sometimes giving people what they want is no help at all. 

In the future, I hope you resist the pull of heart strings and find ways to help family and friends that don't involve putting your financial future at risk.