Does Seller Financing Qualify for the $8,000 First Time Homebuyer Tax Credit?

tax-creditGreat 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, and
7. the duty to maintain the property.
Source: First-Time Homebuyer Credit Questions and Answers – Basic Information at:
Of course the home buyer must still meet the other criteria for taking the $8,000 tax credit.  For more details be sure to read the original post Using Owner Financing with the First Time Home Buyers Tax Credit.
Author’s Update:  This law was extended and expanded on November 6, 2009.  Be sure to read the update at:

First Time Home Buyer Tax Credit Extends to 2010 and Expands to Existing Homeowners!

About Tracy Z

Tracy combines her knowledge of cash flow notes with the power of marketing online to help grow your business! She can be reached at Tracy@NoteInvestor.com 1-888-999-7905 or at Exposure One Marketing.

Comments

  1. I bought a house contract for deed and they keep delaying my tax credit because the title was not properly put into my husbands and I name. Is there a way that you know of to fix this before it is too late and we do not receive the money?

    • Hello Stacey,

      Legal title on real property like a home transfers when the Warranty Deed is recorded. The seller retains title when using a Contract for Deed since the deed is not recorded until the payments have been made in full. The IRS has specifically stated the Contract for Deed is eligible for the tax credit provided the buyer meets the benefits and burdens of ownership.

      I’m not sure if the IRS is unclear of their own policies or if there is something in the Contract itself that they have issue with. I’d suggest sending the IRS a copy of your Contract for Deed and the HUD-1 Settlement statement along with the following information taken word for word from their own website:

      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, and
      7. the duty to maintain the property.
      Source: First-Time Homebuyer Credit Questions and Answers – Basic Information at:
      http://www.irs.gov/newsroom/article/0,,id=206291,00.html

      Most standard Contract for Deed forms include provisions that meet the seven IRS burdens and benefits of ownership. If there is something missing from the Contract for Deed to meet the IRS requirements it should be possible to amend the Contract for Deed.

      Please understand that I am sharing my general knowledge and am not licensed to give legal or tax advice. Since time is limited and there is quite a bit of money at stake I’d suggest you seek the counsel of an attorney if you can’t get this resolved with the IRS.

      Wishing you the best with this!

      Tracy Z. Rewey

  2. Per the Insurance issue on Contract for Deed above thread …….

    Tracy
    Thanks much for your comments. basically the dilema we/I/us run into is that on a
    C for D, the buyer is not listed as the deeded owner of the property in public records,but held until the contract is fulfilled. The issue is that if there was an insurance loss, ie
    fire, damage,… the insurance company may view it as the insured is not the owner if the policy is in the buyers name. This is the issue that my insurance agent brought up. Now, it may be proved that the buyers do have an equitable interest via the C for D and get around that but would need to make sure. I’ve gotted a lot of blank stares when I bring up this issue.
    The buyers do indeed make a 1/12 payment via escrow, which I ultimately pay to cover the policy, but it does not cover their contents so I have them also get a “renters” contents policy.
    I’m sure others do something different and would like to hear from them via this thread.

  3. Leila Vitale says:

    We sold on a land contract in 2008, we have not collected a payment for 4 months, however the vendee said he had a new buyer so we did not foreclose. The LC stipulated that the vendee could not sell without owner consent. We consented provided certain conditions were met, such as all payments brought up to date prior to closing. The vendee lied to us and closed with the new buyers without us signing anything, or giving written consent. He collected a down payment from the new buyers and did not pay us.

    My thought is that the Assignment of land contract is not valid because he did not follow the terms of the original land contract. Am I correct? Can we foreclose on the contract and sue for breach of contract? Also can the new buyers file fraud charges against the vendee?

  4. One question I have specifically to this is the IRS item #4 and #6 above:
    4. the obligation to pay property taxes.
    6. the responsibility to insure the property.
    How I normally handle Contract for Deed (C of D) sales is that I compute PITI
    to include taxes and insurance to be paid monthly (ie escrow). The Deed is
    not transfered upon initial close, COE. but held until paid in full.
    On the property tax issue, they pay monthly escrow and I pay the tax
    myself when due. I NEVER let the buyer pay the taxes themselves. They have
    a tendancy of “forgeting” to pay them.
    On the insurance issue, I have the home insurance in my name/LLC due to the
    fact that the property still shows my name/LLC as the owner of record. I then
    require the buyer to get a “renters insurance” policy to cover their contents.
    I feel that, in talking to my insurance agent, that this is the best way to CYA with
    regard to a potential loss due to the buyer not being shown on record and the
    adjuster/insurer denying the claim because of this. The down side is that if there is
    a claim, specifically liability, that it will be against “my” insurance instead of the buyers name.
    I feel in this method that it meets the requirements of the IRS per #4 and 6 above due to the fact the buyer pays for it in the monthly payment.
    Does anyone have input ? specifically to the insurance issue ?

    • Hello Glen,

      An escrow reserve account for taxes and insurance is fairly common and provides protection for both the buyer and seller when providing owner financing.

      I believe it would be fairly straight forward to show that the buyer has the obligation to pay the taxes and insurance. This obligation would be spelled out in the contract (or note, mortgage, trust deed) and further evidenced by the buyer paying an amount equal to 1/12th the annual insurance and tax amount.

      The second portion of your question related to the actual insurance policy raises some interesting issues. We generally show the buyer as the insured and the seller as the lien holder on the insurance policy, even with a contract. Most of the investors that we have sold our paper to have also made this a requirement to selling the payments.

      I have not had experience related to the method you described of showing your company as the owner and requiring the buyer to obtain renter’s insurance. It seems the renter vs. the owner’s insurance policy creates a question that you might want to explore further with a tax attorney or CPA that specializes in this area of the IRS tax law. (Basically that’s my disclaimer that I’m not an attorney or CPA!)

      I encourage other readers to chime in on the subject. Thanks for reading and commenting at NoteInvestor.com.

      Tracy Z. Rewey

  5. where did you read this?

    • Hello Atroronge! Most of what we write about at NoteInvestor.com has come from personal experience gained from actively using seller financing for the past 20 years.

      We have also been researching how owner financing qualifies for the $8,000 First Time Home Buyer credit from the IRS website (always best to go to the source). If you are looking for additional resources here are some helpful links:

      IRS Website: http://www.irs.gov/newsroom/article/0,,id=206291,00.html

      NoteInvestor Bookstore: http://noteinvestor.com/bookstore/

      All the best,

      Tracy Z. Rewey

  6. M. Sylvain says:

    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.

  7. 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?

  8. 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.

  9. 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

  10. 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.

Trackbacks

  1. […] $$ 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? […]

Speak Your Mind

*