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: