∙ A House Response To Rising Unemployment (And Lobbyists) [SocketSite]
∙ Nelson Says Senate to Extend, Reduce Homebuyer Credit [Bloomberg]
∙ U.S. Stocks Retreat on Concern Housing Tax Credit to Phase Out [Bloomberg]
San Francisco real estate tips, trends and the local scoop: "Plug In" to SocketSite™
∙ A House Response To Rising Unemployment (And Lobbyists) [SocketSite]
∙ Nelson Says Senate to Extend, Reduce Homebuyer Credit [Bloomberg]
∙ U.S. Stocks Retreat on Concern Housing Tax Credit to Phase Out [Bloomberg]
A friend and his wife moved to the Peninsula last month (so they could send the kids to public school and save the $90K a year to send three kids to Town and Burke). They didn’t think they could get the $8K credit since they had both owned multiple homes but their Realtor and Mortgage broker set things up where they just co-signed for their 5 year old son “the first time buyer” who is actually on title as the owner of the home…
Broker – If you never really liked them, here’s your big opportunity:
http://www.irs.gov/compliance/article/0,,id=180171,00.html
A 5 year old homeowner ? Wow, that’s a crazy loophole and certainly not in the spirit of the incentive. LMRiM would love that one.
One wonders what would happen a few decades from now when that 5 yr old tries to use whatever “first time homebuyer” incentive becomes available in the 2030s. I’ll bet that the 2009 “purchase” won’t show up on a record search.
That’s no loophole. That’s breaking the law. You can’t use your children as a way to claim the credit.
http://ftp.irs.gov/newsroom/article/0,,id=206291,00.html
Q. Can a dependent on someone else’s tax return claim the first time homebuyer credit if they otherwise qualify?
A. Yes. There is no limitation under section 36 that a first-time homebuyer cannot be a dependent. However, taxpayers who do not otherwise qualify for the credit do not become eligible for the credit simply by using a minor child’s name. In addition, under state law children under the age of 18 generally are not bound by any contract they sign and cannot be required to comply with the terms of the contract. Thus, it is extremely unlikely that a seller of a home, or a lender if financing is required, would enter into a bona fide sale of a home to a child. Merely using the child’s name to purchase a home does not qualify the child for the credit if, in substance, the child is not a bona fide purchaser of a home.
aptbroker: since it is our money being spent – do us all a favor and report them
The fun part. I believe that the IRS has a program where whistle-blowers could get up to 10% of any funds recovered from a tax cheat.
Assuming that the rules in current law would still apply, it wouldn’t matter if it did show up on a record search, because of the definition of a “first-time homebuyer”:(scroll down to “Q. Who is considered to be a first-time homebuyer?”)
… that’s not to excuse the outright fraud on the part of the mortgage broker in the aforementioned anecdote, but hey, that’s what a lot of mortgage brokers do.
And if you ask mortgage brokers who think like that why they think this type of behavior is ethically acceptable, you’ll probably get “Well, they were just trying to put food on the table/make the payments on their Land Rover/pay their own bills …”.
Which is why a lot more mortgage brokers need to go go jail before this kind of thing will taper off.
I think FAB is pulling SS’s collective leg. If the story is true, it is almost comically easy for the IRS to catch this without any special effort.
And what does this family call themselves?
The Aristocrats
That’s a good one!
I think FAB is pulling SS’s collective leg. If the story is true, it is almost comically easy for the IRS to catch this without any special effort.
could be. but a recent audit found that there were quite a few minors who had bought houses using the 8k tax credit, including a 4 year old.
Tax Credit Abuse and the Four-Year-Old Home Buyer
highlights:
* Some 580 filers under 18 years of age had claimed almost $4 million in first-time home-buyer credits, including one that was just 4 years old. “Contract law generally exempts children under the age of 18 from being bound by the terms of a contract,” Mr. George said in written testimony. “Therefore, it is unlikely that these taxpayers would have entered into an arm’s-length transaction for the purchase of a home.”
* Some 74,000 tax credit claims worth $500 million came from taxpayers who had indications of prior home ownership within the preceding three years.
* Another 19,300 tax returns in 2008 were filed claiming the credit for a home that had not yet been purchased. Those credits totaled more than $139 million.
Yikes.
If there were RE agents ready to wheel and deal when times were good, why wouldn’t they team up with their former mortgage broker buddies now that times are tough?
Can anyone point to any tough enforcement efforts that would set an example for those aiming to practice their trade ethically?
Me neither.
Embarcadero, I think there’s a lot of truth to your observation. I guess I’m hoping, against all evidence, that high-profile prosecutions will clean things up a bit, in conjunction with a lot of real estate agents and mortgage brokers hopefully finding another line of work as the number of real estate transactions yearly dwindles.
Folks on socketsite don’t seem to have a lot of respect for most local elected officials, but note that the DA recently won a $1 million federal grant to fund a dedicated mortgage and investment fraud unit. It’ll be interesting to see what effect that has over the next two years.
And if that doesn’t work, contra Doug Llewelyn, you can always take the law into your own hands, find the mortgage broker who was supposed to be helping you, and put the beat down on them.
I sent a couple of the links above to my friend and he tells me that the actual buyer was a LLC that his son controls and he says that as far as he knows what they did was legal…
the actual buyer was a LLC that his son controls
ROFL.
Well hopefully the LLC the 5 year old controls has some legitimate purpose other then avoiding taxes and claiming the credit. The IRS will try to ignore these types of entities if everything is not done perfectly.
Broker –
If I were you I would urge and beg your friend in the strongest possible language to not go forward with this unlawful scheme when it comes time to file their taxes.
I am the managing member (i.e. CEO) of an LLC that does a fair amount of business so I know quite a bit about LLC law in California, and also in regards to filing taxes at the Federal level.
An LLC is very similar to a partnership: all taxable income generated by the LLC is passed through to the individuals who own the LLC (i.e. “members”) on an annual basis via K1 forms which are filed along with the LLC’s returns. So LLC’s aren’t taxed as a separate entity like a corporation is (although LLC’s do pay a separate California LLC fee/tax depending on annual revenue). As a result it will be plainly evident to the IRS who the members of the LLC are via the K1’s, and it will be very easy for the IRS to see that the LLC owner claiming the credit in this case is only five years old. I can easily imagine this will turn up as an automatic red flag to the IRS and will be investigated fairly quickly.
As the “managing member” of the LLC purchasing the property (which he must be since the parents can’t be members) the son will still need to sign the purchase agreement on behalf of the LLC. Problem: in California (and the rest of the US) the minimum age to enter a legally binding contract is 18. The only exception is if the minor is emancipated. Good luck getting a judge to approve the emancipation of a five year old.
The only way the five year old could legally buy the property and claim the tax credit is if the five year old was generating enough income to fund the purchase (possible in LA where there are any number of child actors, but fairly unlikely in San Francisco).
The next problem is the mortgage broker and/or your friend must be doing some slight of hand with the lender here (and since there is a mortgage broker there must be a lender). If you enter into a contract with a minor the minor can screw you at any time and you are powerless to do anything about it. There’s no way a lender would knowingly lend money to a five year old, let alone one with no income or credit record. So I’m guessing the arrangement here is that the lender is lending the money to the adults who are then transferring ownership to the LLC, who is then going to be the owner of record. The parents aren’t members of the LLC (or else they would not qualify for the tax credit) so how can the lender foreclose if payments are no longer made? Do you see the problem here? In the scenario you have described there is no way to get from A (parents own the property) to B (child owns the property) without committing mortgage fraud.
While there is always a chance they might get away with it I don’t see how on earth it would be remotely worth the risk of fines, penalties, and possibly criminal records and/or jail terms just to claim a measly $8k credit.
If they make enough money to not qualify for the credit (or are previous homeowners) then they should thank their lucky stars for their good fortune and leave it alone. A little greed could destroy the entire family and everything they have worked for. This is a terrible, terrible idea and I would copy and paste this post and send it to them pronto. There is no loophole that will allow them to claim the credit.
I put this one in the category of other FAB-ulous yarns: the AK-47 totin’, home invasion slumlord combatting druglord infestation with SWAT-like maneuvers, the one where he used to regularly follow Peninsula r.e. market’s home sales @ age 6, and numerous other tales beginning with “I used to be an apartment broker in SF and … ” LOL.
Don’t rat out the family to the IRS.
Rat out the family to the 5-year old kid.
Imagine how miserable their tax-fraud domestic life would become if every time they tried to enforce a little discipline, Johnny-the-Five-Year-Old-Homeowner whipped out the LLC documents and said, “As General Partner, if you are going to live in my house, you are going to obey my rules.”
And, anyway, I think I read that Treasury Secretary Timmy Taxcheat has turned to handing out citations to the most creative evaders, rather than fines & penalties.
This is a pretty enjoyable conversation, and I generally love FAB’s contributions, but I have to agree that it seems like either he is pulling SS’s leg or he is getting his own leg pulled! The part that is most believable is that a realtor and mortgage broker are giving “advice” to get a deal done for which they have no qualifications whatsoever and that is almost certainly tax fraud. I’ve told the story here before how my first realtor tried to get us to buy a 2-flat by selling the depreciation benefits of the rental unit — which we could not realize because our income was too high, as I learned within 30 seconds of talking to a real tax professional.
The credit is all but irrelevant to the SF market anyway — except at the extreme low end (where, not coincidentally, all the action is now) — because of the income phaseouts for the credit. For a married couple, the phase-out range is $150,000 to $170,000. For singles, the phase-out range is $75,000 to $95,000. The only homes anyone is buying at those income levels are extreme cheapos by SF standards. Hence, SF continues to see declines in both volumes and prices. Other parts of the Bay Area and California generally have seen big volume benefits from this.
A bit late to the party, but in today’s sfgate:
The compromise also includes anti-fraud language that gives the Internal Revenue Service authority to do greater oversight during the processing of the return rather than waiting for an audit. The amendment requires the taxpayer claiming the credit to be 18 or older and requires a HUD-1 settlement statement to be attached when claiming the credit.
http://www.sfgate.com/cgi-bin/blogs/pender/detail?entry_id=50578&tsp=1