My Wife Isn't On the Title to our House, Does That Make Her a First-Time Home Buyer?

by Harvey M Lotstein, CPA

I owned a condo when I married my wife 6 years ago and she never was put on the title. When we purchased a new home this year, we liquidated my wife’s 401k to help with the down payment of our new home. Is my wife considered a 1st time home buyer? If so, can I avoid the federal and state penalties for early withdrawal of my wife’s 401k? We now rent out the condo. Do I use the purchase price of the condo for depreciation purposes? Do I need to subtract the land portion of the value for depreciation purposes?

You asked several good, related questions. Let’s see how the answers do for you.

Is your wife considered a first time home buyer (FTHB)? The law goes out of it’s way to include a spouse as an owner for the first time home buyer exception to the early withdrawal penalty. No, she is not a FTHB.
If she Is a first time home buyer, can she avoid the penalty on early withdrawal from 401k plan? No, for TWO REASONS. The first, she does not qualify as FTHB. Second, this escape is only good on early withdrawals from regular IRAs. It does not apply to 401k, pensions, Roth IRAs, etc. For a true FTHB to use this, they should roll the funds into an IRA, then withdraw the funds. They should also be careful to not be hit by early withdrawal penalties by the IRA trustee, such as a minimum CD holding period. Use a passbook savings account. A trustee to trustee rollover is safest. This way, you do not touch the check or risk withholding.
Do I subtract the land value before depreciating? Yes, but where do you get the number? Look at your property tax bill. It will show amounts for land, improvements and a total. Do not use the raw numbers. Instead, take the percentage that is land, and subtract that percent from the depreciable basis. I explain this in the next paragraph. For example, if the bill shows land $30,000, improvements $70,000, total $100,000, then 30% is land, so you can not depreciate 30% of the cost.
Do I use the purchase price of the condo for depreciation? Not exactly. We use a number called the “cost basis” for depreciation. This is the purchase price after increasing it for most closing costs, and adjusting it for things, such as items previously deducted on a tax return. There may be other adjustments—both up or down—to consider. Once you have determined the cost basis, then subtract the land value. Be sure that you do not include other assets, such as appliances that are not part of the building. They are depreciated separately. Get a copy of IRS Publication 527 for more information on all of this. It can be downloaded from 1040.com.

I wish I had better news for you. The FTHB was a non-starter in your case. I hope some other taxpayer reads this and makes use of the ideas included to save themselves future tax problems. To them, you will be a hero.

Harvey M Lotstein, CPA is a sole practitioner in Buena Park, Ca. You may call him at (714) 995-5535.

Have a question for a CPA? Ask it here.