Financing in 47715>Question Details

Greg, Home Buyer in 47715

Will I get homebuyers credit? - Land contract, Taxes and Insurance

Asked by Greg, 47715 Sun Feb 14, 2010

I've spent hours and hours researching and can't seem to find a definite answer. I posted another question, but wasn't real clear. I am considering buying a house on land contract from my brother. I know I qualify for 8,000 buying from a sibling, even though its on contract. My question is, he has an FHA mortgage that escrows taxes and insurance. See number 4 and 6 below. In the contract signed with my brother I would have to pay the taxes and insurance, but will I qualify even though I pay them to my brother in the installment contract and they are escrowed then paid? Has anyone ran into this? I appreciate any assistance.

2 of the requirements for credit on contract sale on IRS website in question:
4. the obligation to pay property taxes
6. the responsibility to insure the property

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Help the community by answering this question:


I'm not an accountant, and you really need one in this case.

However, the paragraph you're citing reads:
Q. 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?

A. 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. (7/2/09)

This will remain a gray area, since the IRS says these are "factors that INDICATE that a taxpayer has the benefits and burdens of ownership." So, the more of those you meet, the better your chances are that the IRS will consider that you have the benefits and burdens. It's not "must satisfy 6 out of 7" or anything like that. My guess is that some accountants would push the envelope a bit and say you do qualify, while others, more conservative, would say you don't. That can happen.

Again, I'm not a lawyer or an accountant. However, my own non-professional evaluation is:

1: Right of Possession.
Yes. However, remember, this has to be your principal residence. And you must have the right of possession. Assuming that this will be your principal residence and you have the right to live there, you'd meet this criterion.

2. The right to obtain legal title upon full payment of the purchase price.
Yes. Just make sure your paperwork specifies this.

3. The right to construct improvements
Make sure your paperwork specifies this. Get it down in writing.

4. The obligation to pay property taxes.
This is where an accountant comes into play. The question is: To whom do you have the obligation? Clearly, you're not obligated to FHA. That's your brother's responsibility. However, the language here is unclear. Your land contract certainly could be constructed making you obligated to your brother to pay the property taxes. So your land contract would break out your obligations to pay the principal and interest, your obligation to pay to your brother all taxes due on the property, and your obligation to pay all interest due on the property. Thus, your payment to your brother could fluctuate depending on taxes and insurance.

5. The risk of loss
Make sure that this is explicit in the land contract.

6. The responsibility to insure the property
Check with an insurance agent to see whether you--buying a property on a land contract--are able to purchase insurance on the property. Again, as in 4, the question is to whom you have that responsibility. If you are able to purchase insurance on the property, then the land contract should specify that it's your responsibility to do so. If you're not able to, then the land contract should specify that it's your responsibility to at least pay for the insurance. Again, check with an insurance agent; I don't know the answer to this one.

7. The duty to maintain the property.
Yes. This can be addressed adequately in your land contract.

Again, none of this is legal or accounting advice. And I'll admit it doesn't get you too much farther than you already had gone--the two questionable indicators are the ones dealing with property taxes and insurance. You can take steps to make those as strong as possible. And, again, it's not a test of "6 out of 7" but rather factors that indicate you have the "benefits and burdens" of ownership. An accountant will also tell you that there may be other indicators beyond those 7 that the IRS could look at, as well.

A final thought: The IRS in its Q&A specifically addressed land contracts, and specifically indicates that under certain conditions they do qualify. Thus, it's likely--again, not legal or accounting advice--that a properly constructed land contract can be found to qualify.

So, consult with an accountant and, probably, an insurance agent regarding item 6.

Hope that helps.
0 votes Thank Flag Link Mon Feb 15, 2010
Don Tepper, Real Estate Pro in Burke, VA
Thanks to all for your input. I decided even though its a legitimate transaction, the IRS may look on it otherwise. I can't afford the house without the credit, so its not work the risk. Thanks again!
0 votes Thank Flag Link Mon Feb 15, 2010
Hi Greg,

Yes a Land Contract is a strategy that I have used to sell properties and the buyer was able to collect the tax credit.

Here is a link to a real estate investor website that provides details about this strategy.

Good Luck!
Hannah Fliegel
The Credit Repair Expert
0 votes Thank Flag Link Mon Feb 15, 2010
Thanks for your answer Greg. I get asked that question a lot. Maybe I should go get a CPA license with all the tax questions people ask.
0 votes Thank Flag Link Sun Feb 14, 2010
Thanks for your responses. I do want to point out, this is not an issue of purchasing from a sibling. Upon my request, the IRS confirmed to me in email I am eligible when purchasing from a sibling. You qualify for the tax credit as long as you do not purchase from a parent, grandparent or linear descendant. See page 2, 9.a of 5405 instructions.
0 votes Thank Flag Link Sun Feb 14, 2010
Greg -

As Larry wrote, you definitely need to seek legal and tax advice on this issue.

Add to all your questions the fact that your brother owns the property. According to Form 5405 Line E, you can not buy from a relative and qualify for the credit.

Be careful and prudent!
0 votes Thank Flag Link Sun Feb 14, 2010

You will not qualify for the tax credit if you're purchasing the home from a relative. Here's the link: See question and answer #10.
0 votes Thank Flag Link Sun Feb 14, 2010
Greg, you are going to need a lawyer and an accountant for this. If you assume your brother's loan, I believe you can get the credit. If he sells it on contract, without assumption, he will most likely be in breach of his mortgage agreement. You could all get into a big mess over this.
0 votes Thank Flag Link Sun Feb 14, 2010
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