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By the time the loan was closed on the land contract, the contract was no longer valid. I paid real estate taxes and mortgage 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 credit. 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 title 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 lender. 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 principal 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 attorney or tax preparer.