To receive the $8000 tax credit, you must be a first time home buyer.  And, as is widely reported, a first time home buyer is anyone who has not owned a home in the past 3 years.  Simple enough.  Right?

Well, no.  My definition of not having owned a home in the past 3 years was simply calendar years.  So if you sold a home in October of 2006, then rented, and are now closing on a new home in November of 2009, then you qualify for the tax credit as a first time home buyer.  And, I was wrong.

Here is an email that I received from a recent client that I helped to finance a home:

I do have some unfortuante news relating to the First Time Homebuyer Credit. The IRS has denied my refund be cause I owned a home for one or two months in 2006. They require 3 full “tax years” to re-qualify. So, even though I qualified as a FTHB for the loan, I did not qualify for the tax refund.    - Will

Turns out, the IRS defines the three years as being three tax filing years, not calendar years.  An important and potentially expensive distinction.  Now, for the $6500 tax credit for move-up buyers, you need to have lived in your home for 5 of the last 8 years.  That seems more cut and dried, and not so open to interpretation.  However, I wonder if you live in the home from December, 2004 to present, if the IRS would interpret that as 5 tax years as well?

I will try to get the answer, and post it here.