Does Seller Financing Qualify for the $8,000 First Time Homebuyer Tax Credit?
October 19, 2009 by TracyZ
Great news! The IRS has specifically answered “YES” to this question.
It seemed pretty straight forward that owner financed transactions involving a deed to the buyer and a note and mortgage (or deed of trust) back to the seller would let qualified buyers take the First Time $8,000 Homebuyer Credit. However, some wondered if the credit was still available when the seller financing involved a contract for deed, installment land sale contract, or long-term land contract.
One big difference with a contract is that the seller stays vested in fee simple or legal title while the buyer makes the payments. When the buyer has made payment in full on the contract then the Warranty Deed transferring title is recorded. This Warranty Deed is recorded upfront at closing when using a a seller financed mortgage or deed of trust. (For more details and differences read What is a Real Estate Contract?)
The IRS has specifically addressed this issue on their website. It outlines the buyer must meet the benefits and burdens of ownership and includes 7 test points. Here is an excerpt from the Q&A page at www.irs.gov:
Question: 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?
IRS Answer: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, and7. the duty to maintain the property.Source: First-Time Homebuyer Credit Questions and Answers – Basic Information at:
First Time Home Buyer Tax Credit Extends to 2010 and Expands to Existing Homeowners!
[...] 9. Think Creatively – If a first time home buyer has difficulties qualifying for a bank loan they might consider purchasing a property with owner financing. Also known as an installment sale, the seller agrees to “be the bank” and accept payments from the buyer. This allows a buyer to take advantage of the 2009 tax credit even when banks say no to a mortgage loan. The IRS might not recognize the closing date on a Contract for Deed so a Warranty Deed from the seller to the buyer with a Note and Mortgage (or Note and Deed of Trust) naming the seller, as the payee might be preferred for this purpose. (Author’s Update – The IRS has recently addressed the Contract issue. For more details please refer to Does Seller Financing Qualify for the $8,000 First Time Homebuyer Tax Credit?) [...]
[...] $$ Utilize seller financing to provide alternative financing for buyers even when banks turn down a conventional mortgage loan. For details on the IRS approval of using the installment sale with the tax credit read Does Seller Financing Qualify for the $8,000 First Time Home Buyer Tax Credit? [...]
I would love to think creatively in this economy and our government has assisted us in this notion. The IRS has shared the good news that owner financed arrangements will be rewarded for those with wounded credit by allowing this arrangement to be included in the tax credit group. Congress has done its part to encourage wannabe homeowners that are often young people with credit mistakes…
I would like to do my part by entering into an owner finance with a fabulous young couple; however, WELLS FARGO MORTAGAGE COMPANY has informed me that they will excersice the Due-on-Sale clause if I do this… meaning I cannot owner finance these young buyers or WELLS FARGO will call the loan due..
SHAME ON YOU WELLS FARGO for counteracting everything the government and our people are tyring to do for each other in these trying times!!!
Thanks for your comment Jen and we are pained to hear about the bank’s lack of cooperation. Many lenders are just happy to receive payments on a mortgage loan these days in the face of all the delinquent payments and foreclosures. In some cases a lender will decide to not exercise their rights under the due on sale clause. Readers interested in more information on seller financing with underlying liens or the all inclusive trust deed can read the article: Wraparounds with Underlying Liens.
My girlfriend and I contracted to buy a house together but she had better credit and the mortgage went with her. She is not a first time homebuyer but I am. However, I am not on the deed. I am however on the escrow account, the insurance and most of the utilities. Can I claim the tax credit?
Hello Rob! The IRS has quite a few qualifiers to determine eligibility. The first question that comes to mind is when the house was purchased. The new extended and expanded Home Buyer Tax Credit that went into effect Nov 6, 2009 now allows some existing and long-time homeowners to take the credit upon buying a replacement principal residence. The $8,000 tax credit is no longer just for first time home buyers. This might allow for your girlfriend to take the credit.
In order for you to personally take the credit you would most likely need to meet the 7 benefits and burdens of ownership outlined by the IRS. This includes either having legal title or the right to obtain legal title upon full payment of the purchase price. I am not a CPA or attorney so I am unable to provide tax or legal advice. However, I encourage you to seek the opinion of a tax professional on this matter as it is well worth it to receive the $8,000 tax credit! Also, the IRS does a pretty good job of outlining all the requirements along with several sample scenarios that are similar to your situation at: http://www.irs.gov/newsroom/article/0,,id=206291,00.html.
We appreciate your comments and questions at NoteInvestor.com!
Tracy Z. Rewey
Hi,
If you purchase a house by owner financing before the deadline, I see that you will qualify for the credit. My question is, do you get the $8000 very quickly like people who buy their first home through traditional financing? Some people have told me they get the $8000 check in the mail right after closing. Is this true also for owner financing? Or do you have to wait to claim it on your taxes for next year? Because if you have to wait an entire year that would be… unfortunate.
Thanks so much for any help you can give.
Lauren
Hello Lauren! Many buyers are speeding up access to the credit by using loan programs offered through FHA lenders and state financing agencies. These programs allow the $8000 first time home buyer credit to be applied to the down payment or settlement costs at closing.
At present there are no state or federal government programs that facilitate using the tax credit at closing with seller financing. A seller financed transaction still qualifies for the $8000 credit but the buyers have to claim on their federal tax return. As you pointed out, this can cause delays in receiving the refund.
In order to gain access to the cash faster, some buyers have elected to adjust their income tax withholding, which increases their take-home pay. This involves revising the W-4 on file with their employer or through their quarterly estimated tax payment.
There is also a creative solution that some motivated sellers might consider. When using owner financing the seller could allow the buyer a credit towards the down payment equal to the amount of the First-Time Home Buyer Tax Credit. The seller then carries back a seller financed second lien for that same amount. The due date for the second lien will be around April 15th of next year. When the buyer receives the tax credit they use the funds to payoff the seller financed second lien. The seller could also wrap the down payment credit into an owner financed first lien requiring a lump sum payment in addition to any monthly payments.
There are of course risks with this approach. Should the buyer fail to use the First-Time Home Buyer Tax Credit to pay the owner financed down payment credit the seller might be forced to initiate foreclosure proceedings. A seller would also want to be certain the buyer qualifies for the full tax credit. A qualified tax professional and real estate attorney can help provide protection for both the buyer and seller.
It looks like I am doing an owner finance for a house that I own. I’ve been trying to sell it for over a year now, and it looks like I may have a buyer if I’m willing to owner finance.
I have a married couple who would like to by my house. They did own a house within the past 3 years and lost it (due to loss of job). They are now renting and the husband has a nice job. The house was in the husband’s name only. Can the wife purchase my house and receive the tax credit?
Would she be able to buy my house in her name, and receive the full credit?
If they buy the house together, would she be eligible for 1/2 credit or no tax credit at all?
Can you please let me know how to go about getting the down payment for seller financing at the closing table?
Hello M. Sylvain! The down payment usually comes from the buyer’s savings and is made through the closing agent in the form of a cashier’s check or wire transfer. It protects both the buyer and the seller to have the closing and funds handled through a title company, attorney, or other licensed closing agent. There are also times a seller might agree to finance the purchase with a small or no down payment from the buyer.