Staying Out of the Dog House

Originally published on Passive Activities and Other Oxymorons on February 18th, 2011.
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CCA 201104037

This was a ruling about whether someone qualified as a "first time" home buyer.  The "first time" is really a misnomer because your home buying virginity is restored if you haven't owned a principal residence for three years.  I'm reproducing this one almost in full:

From: —————————— Sent: Tuesday, October 19, 2010 11:48:41 AM To: ——————————- Cc:

Here are the facts as we understand them. The taxpayer's residence was destroyed by a fire on ——————. On that date, the (destroyed) home ceased to be the taxpayer's principal residence.

In the latter part of 2008, the taxpayer began construction of a new home on the same property on which the destroyed home used to be located. The taxpayer occupied this new home on ——————.

During the period of ——————-through ——————, the taxpayer lived with his girlfriend, and sometimes at the homes of relatives and other friends. When the taxpayer began construction of the new residence in late 2008, he also lived in a storage shed / dwelling unit on the property where he was constructing his new home. The storage shed had a stove, refrigerator, bathroom, sleeping apparatus, and heat.

The taxpayer spent about 40% of his time in the storage shed / dwelling unit, and most of the rest of the 60% of his time living with his girlfriend.

Based on those facts, the storage shed / dwelling unit is a residence for purposes of section 121. Under Reg. section 1.121-1(e)(2), the term dwelling unit has the same meaning in section 280A(f)(1). Under Reg. section 1.280A-1, a dwelling unit includes a house, apartment, condominium, mobile home, boat, or similar property, which provides basic living accommodations such as sleeping space, toilet, and cooking facilities.

Although the storage shed / dwelling unit is a residence, it is not the taxpayer's principal residence because he did not spend the majority of his time there. Reg. section 1.121- 1(b) provides, in part, that if a taxpayer alternates between two properties, using each as a residence for successive periods of time, the property that the taxpayer uses a majority of the time during the year ordinarily will be considered the taxpayer's principal residence.

Therefore, the taxpayer meets the definition of a first-time homebuyer because he has not owned a principal residence within the three years prior to the date of purchase of the new home (here, the occupancy date). In this case, the taxpayer may only include the cost of construction of the new home in calculating the credit.

They always leave out the details that interest me.  What were the key factors in whether the taxpayer was sleeping with his girl friend or in the shed?  Conceivably it was tied in with his work schedule in fixing up the house.  Of course the other possibility was that it was an index of the relationship quality.  So there it is.  A forgotten birthday, a few less flowers, some unkind remarks about her friends and the toilet seat left up a couple of times and we would have had a totally different tax result.

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