Land contract in WI

[10SorTAX]

Late in 2008, taxpayer entered into a land contract for a home, which he immediately rented out. We reported rental income and expenses on his 2008 tax return.

Taxpayer closed on the property 12/2009 with a conventional mortgage. He has moved into it as his principal residence (homestead) and is going to rent out his previous residence where he lived for 20 years. His mortgage broker believes that this new purchase qualifies for the $6500 credit for existing homebuyers. I doubt it, but I continue to argue both sides of the argument to myself. I researched land contracts last year and again this year (I'm from CO where we don't see land contracts, client is in WI) and what I've learned is: "A land contract splits title into two parts-legal and equitable. Legal title remains with the seller until the land contract is paid off. Equitable title is what is given to the buyer at closing. Thus, the buyer with equitable title is deemed the owner of the real estate and must insure it, pay real estate taxes, and pay for it." Based on that, I figured he owned it when he entered into the land contract in 2008, which would preclude him from the $6500 credit. Can anyone out there with experience with land contracts help me determine once and for all whether or not he qualifies for the credit for existing homebuyers. Thanks!

[mcb39]

If the taxpayer obtains the benefits and burdens of ownership in a seller-financing arrangement, the taxpayer can claim the credit even though the seller retains legal title. (e.g. a contract for deed, installment sales contract, or lang-term land contract) This is taken from The National Income Tax Workbook for 2009 for Wisconsin.

In addition, remember that the credit is based on the date of purchase and not the date of occupancy except when the residence is constructed by the taxpayer.

I would say that this is a definite "No".

[10SorTAX]

Thanks for confirming my thoughts, mcb39. I just wasn't absolutely certain if the date of purchase was when he entered into the land contract or when he closed on the property. Finally, I can stop arguing with myself (and the mortgage broker).

[Lion EA]

Don't work with land contracts, but sounds as if the original purchase was with the land contract and the subsequent mortgage is more like a refinancing of the prior purchase. If so, that would make the purchase date too early for the new law for existing homebuyers.

[carolynm]

Directly from the website:

Q. Can a taxpayer claim the first-time homebuyer credit if the purchase is pursuant to a seller financing arrangement (for example, a contract for deed, installment land sale contract, or long-term land contract), and the seller retains legal title to secure the taxpayer's payment obligations?

A. If the taxpayer obtains the "benefits and burdens" of ownership of a residence in a seller financing arrangement, then the taxpayer can claim the credit even though the seller retains legal title. Factors that indicate that a taxpayer has the benefits and burdens of ownership include: 1. the right of possession, 2. the right to obtain legal title upon full payment of the purchase price, 3. the right to construct improvements, 4. the obligation to pay property taxes, 5. the risk of loss, 6. the responsibility to insure the property and 7. the duty to maintain the property. (7/2/09)/quote]

I'm glad this post came up. I did some research last year and didn't think the contract for deed would qualify, but in reading through this post and the IRS page, I think it will. I have rental property I'd like to sell and the tenant would like to purchase it but can't affort the down payment. This might be our answer.

[mcb39]

It is your answer. I have a client who has been renting, cannot get a bank loan at this point; but owner is willing to sell to him on a land contract. A land contract, if properly executed, is a legal and binding vehicle. This client is going ahead with the purchase (per land contract) and does qualify for the first-time homebuyers credit. I have another client who has purchased two rental properties on land contracts. Of course, these do not qualify for credits; but they illustrate that he did purchase the properties on the date of the lc and the seller is merely acting as the "banker". He has since been able to get conventional financing on one of the properties because he had built enough equity into it. Often, executors of land contracts will charge a much higher rate of interest because of the risk factor.

Many years ago, we purchased our first home in this manner. We had a land contract with the seller for two years; at which time we were obligated to get conventional bank financing and pay him off. We were responsible for all upkeep, taxes, utilities, etc.; and defaulting would only have resulted in our losing our original (small) down payment and the equity we had built. I have seen nothing in the IRS regs that tells me that this type of purchase is not a legal first-time homebuyer purchase.