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Unfortunately - the lender is correct...
Please see instructions for the form 5405 - http://www.irs.gov/pub/irs-pdf/f5405.pdf
To be considered a first-time homebuyer - your brother should:
-- not own any other main home during the 3-year period ending on the date of purchase - because he inherited 1/4 of this home - that requirement would not met.
You cannot claim the credit if any of the following apply.
7. You acquired your home by gift or inheritance.
8. You acquired your home from a related person.
To be eligible for the credit - your brother should completely disclaim an inheritance and purchase the home for the true fair market price from other siblings.
Please be aware that for the purpose of this credit - a related person includes:
-- Your spouse, ancestors (parents, grandparents, etc.), or lineal descendants (children, grandchildren, etc.) - so the purchase from siblings seems OK for the credit.
Please provide the information above to your tax preparer for considerations.
Let me know if you need any help.
You are correct - but please re-read the answer above.
Because that is a complex issue and relatively large credit is in discussion - I strongly suggest to provide the information above to your tax preparer for considerations.
You may also confirm the answer by calling the IRS 1-800-829-1040.