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Ask Merlo Your Own Question

Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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Hi,I have a real estate question. I have resided in my

Customer Question


I have a real estate question. I have resided in my home for more than 5 years. I am buying a condo in the same city, Austin. The lender classifies me as an investor. At this time, I am leaning towards renting out the condo. Is it possible for me to get the 6500 homebuyer's credit on the condo?
Is it possible to make my current home a investment property ( eventhough I may stay there) and classify the condo as my primary residence to get the 6500 credit ( even though I rent it out). Does this create any issues?

What is the best approach for tax treatment? How should I go about renting the condo out for maximum tax benefit?
Submitted: 5 years ago.
Category: Tax
Expert:  Merlo replied 5 years ago.

Hello supad,


Regardless of how the property is classified, if you actually do not intend to live in that condo and use it as your primary residence, you would not qualify for the repeat homebuyer credit.


You must actually move in to the new property that you purchase and use it as your primary residence. If at any time during the first 36 months after your purchase you would discontinue using the property as your main home, the credit would need to be repaid.


The IRS will be able to check this very easily as they have very sophisticated computer programs to track the use of these homes. And if you plan to rent out the condo and report rental income from the property, that automatically will create a red flag that you are not using this condo as your main home.



Thank you supadhya



Customer: replied 5 years ago.



Have a follow-up.


So, if I convert the condo as my primary residence and make my family home a rental property for tax purposed for the next 3 years, yet physically rent out the condo, does the IRS distinguish this?


What indicators does the IRS use to distingish primary residence and rental property? I would assume that IRS would recognise the cash flow from 1 rental property ( without consideration to which specific one).




Expert:  Merlo replied 5 years ago.

Hello supadhya,


When you claim income and expenses from a rental property, you must list the specific property address on your tax form which is being rented. You also must claim depreciation on the property as part of your rental expenses, and that depreciation is based on the purchase price of the property being rented. So you could not claim rental income and expenses from one property, when they really relate to a totally different property.


There are also many factors that come in to play once you sell a property that was used as a rental. You must recapture the depreciation you claimed through the years on that property, and the property is not subject to any special exclusions from tax as is the case with the sale of a primary residence. So if you now report your real home as rental property, when you go to sell that home it will be subject to full capital gains tax with no exclusion allowed.


This is just simply not something you could do legally, and even if you would decide to try reporting one property as a rental, when in reality it was a different property, your chances of getting caught at this would be extremely high. The IRS is vigorously pursuing people who attempt to claim this credit who are not really entitled to claim it, and they have already prosecuted numerous individuals for tax fraud because of false credit claims.


Not only would you face the distinct possibility of having to pay back this credit if you were caught, but the interest and penalties that would be attached could easily double the amount of what you would be required to re-pay. Not to mention the possibility of facing criminal charges. In my opinion, it would just not be worth the risk you would be taking here.


If you are really determined to apply for this credit, then you should consider actually renting out the home where you now live and moving in to the condo for 3 years. That way you would be in complete compliance with the law and not have any worries.



Thank you supadhya





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