Q: I purchased a home about a year ago, but I used a land contract. The contract started three years ago.
By the time the loanA Loan is an amount of money that is lent to a borrower, who agrees to repay it plus interestInterest is money charged for the use of borrowed funds. Usually expressed as an interest rate, it is the percentage of the total loan charged annually for the use of the funds.. was closed on the land contract, the contract was no longer valid. I paid real estateReal Estate is land and anything permanently attached to it, such as buildings and improvements. taxes and mortgageA Mortgage is a document granting a lien on a home in exchange for financing granted by a lender. The mortgage is the means by which the lender secures the loan and has the ability to foreclose on the home. interest because it was included with our rental payments.
I have received a letter from the IRS saying we do not qualify for the first time home buyer tax creditA Tax Credit is an amount by which tax owed is reduced directly. In other words, a dollar-for-dollar amount is subtracted directly from the taxes you owe.. I have looked through all of the instructions and eligibility requirements and have found no mention of land contracts! This is our first time buying a home and I feel like I am being punished.
A: It’s interesting that you purchased your home using a land contract. In some parts of the country, these contracts are referred to as “purchases installment contracts for deed” or “contracts for deed.”
In essence, when you buy a home in this manner, you close on the initial purchase of the home with a down payment and an obligation to make future payments until you have satisfied the contract. When you satisfy the obligations under the land contract, the seller and owner of the property transfers the titleTitle refers to the ownershipOwnership is the absolute right to use, enjoy, and dispose of property. You own it! of a particular piece of property. to the home to you.
When you satisfy the contract obligations, you close on the purchase of the home and you take ownership of the title to the home.
Unfortunately for you, for legal purposes and for IRS purposes, you are considered the owner of the home upon the initial purchase of the home. While you don’t own the title to the home, you are considered the owner of the home and can deduct the interest payments on the land contract as well as the real estate taxes paid on the home.
You are treated as the owner of the home and the seller is treated as the lenderA Lender is a person, company, corporation, or entity that lends money for the purchase of real estate.. The only issue missing in this arrangement that exists in other owner-lender arrangements is that in those other arrangements the borrower actually has title to the home.
There is a principalPrincipal is the amount of money you borrow if you're getting a home loan. If you're buying a bond, the principal is the amount you're lending. Typically, you'll buy bonds with a face value of ,000. If you buy a ,000 bond, your principal is ,000. in law that permits you to move into the home and start making payments on the land contract and to treat you as the owner of the home. While the seller holds the title to the home pending your payments on the land contract, the seller no longer controls the home. You control the home and the seller holds the title to the home until satisfy the terms of the contract.
The IRS must have seen that in your past returns you deducted interest on the home and may have deducted the real estate taxes on the home. As such, you cannot be treated as a first time buyer in 2009. According to their records, you bought your home in 2007.
The first time home buyer tax credit rules are quite strict about the ownership requirements and dates. Unfortunately, since the IRS considers you to have bought your home in 2007, you do not qualify.
For more details, please consult a real estate attorneyA Real Estate Attorney is an attorney who specializes in the purchase and sale of real estate. or tax preparer.