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Owner financing helps buyers purchase a home, even when banks say “No” to a mortgage loan. No more waiting for perfect credit and a large down payment to buy or sell that house.
But will seller financing qualify for the big tax credits being offered to home buyers?
Great news! The IRS has specifically answered “YES” to seller financing.
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 Home Buyer Tax 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.
Here’s the official stand and 7 test points straight from the IRS:
Question: Can a taxpayer claim the first-time home buyer 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?
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: Internal Revenue Service
Of course the home buyer must still meet the other criteria for taking the $8,000 or $6,500 tax credit. But it’s good to know there are creative financing solutions for taking advantage of the credit by the April 30, 2010 contract deadline and the June 30, 2010 closing deadline.