In order to help buyers determine whether or not they qualify for the $8000 tax credit the IRS defines “relative” as a parent, child, grandparent or grandchild.

Buyers are referred to IRS Publication 544 for more details. In that publication, close relative is further defined as members of a family, including only brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). P.23 ~sec related Persons

I would definitely follow Lisa's advice and discuss this with a CPA/Tax professional.

Hope this helps!

Srplaske,

THAT is a very good question! My Instinct says you qualify..HOWEVER, you better get an accountant/CPA to help/answer that question for you. I am assuming you ARE a first time buyer? I sure hope you get the credit, I am rooting for you! I will see if I can find better information for you, I THINK I understand the Tax Credit , however, as you pointed out, this is a "twist". Do let me know IF you get a definate answer, this would be good to know!
IF it turns out you can not use the credit to buy you grandfathers house, and you decide to look for another home, please let me know if I can help you by referring you to a certified relocation specialist in your area...it takes about 24 hours and it is a free service to you. I am part of our relocation team here, so it is easy to do/help I HOPE you don't need my help this time! :)

Good Luck!