The first time home buyer has restrictions on income. The first time home buyer tax credit requires you to live in the home for 3 years. Also, you can't have owned a home for the last 36 months. In addition, the first time home buyer tax credit has restrictions on who can sell you the home. If you are buying a home from a close relative, you won't qualify for the tax credit. But what if you inherit the home?

Q: My sisters and I recently inherited our mother's house. The sister that is executor of the will also wants to buy the house. The house has to be taken out of Mom's name before it can be sold, and the bank wants to put it in my sister’s name. That way she would refinance the house to pay us off.

She would like to take advantage of the $8,000 first-time home buyer tax credit, because she hasn't bought a house yet. But if she refinances instead of buying the home, she can’t.

Is there a way for her to get a loan and then buy the house using the 1st time home buyer tax credit? Thanks for your time.

A: There are some IRS rules regarding the “purchase” of a home that is being inherited from an estate. But your question raised other interesting tax issues including your question on the $8,000 first time home buyer tax credit, so I tapped the knowledge of Bill Nemeth, an enrolled agent based in Atlanta.

Nemeth started by noting that your sister (who is the executor of your mom’s estate) is a part-owner of the home, since she inherited a portion of the home along with her siblings.

“The traditional way to view the inheritance of her mom’s house is to call it investment property, as there is no intent to have anyone of the sisters inheriting the home use it as her principal residence,” Nemeth explained.

When real estate is inherited, the cost “basis” in the property becomes the “fair market value on the date of the owner’s death or at any time within 6 months after the owner’s death. “The executor gets to pick the better date,” Nemeth added.

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