Can a home buyer qualify for the first-time homebuyer tax credit if they are buying on a land contract (aka agreement for sale, contract for deed)?

When a home buyer purchases a home with seller financing, through an installment sale, using an agreement for sale (also known as a "contract for deed" or "land contract"), the seller generally retains legal title, while the buyer gets "equitable title". The buyer has equitable title because the agreement for sale gives them a claim on the title, and the agreement for sale or equivalent is generally recorded in the public record, to prove that the buyer has equitable title. But the buyer doesn't get full legal title until they pay off the loan to the seller.

There was a big question about whether the buyer would qualify for the first-time homebuyer tax credit, since they weren't getting legal title at the time of the purchase. I called the IRS and asked them about it, around April 2009, and the person I talked to seemed pretty clueless, but her opinion was that the buyer would probably NOT be eligible for the tax credit. But a lot of people must have put that same question to the IRS, because on July 2, 2009, they updated the FAQs regarding the tax credit.

And good news, the answer is YES, the homebuyer does qualify for the tax credit, as long as the agreement meets certain requirements. Here's what they said exactly (from this link on the IRS site):

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. (New 7/2/09)

Investors no longer protected under Arizona Deficiency Judgment Statute?

In Arizona, home owners that have their home foreclosed are exempt from deficiency judgments if their property is under 2.5 acres and consists 1 or 2 units. Previously, that included owner occupants, investors, and even developers. However, a recent bill appears to make it so investors are no longer included.

From Tom Farley, Arizona Association of Realtors, July 16, 2009:

"SB 1271 - Anti-Deficiency Law Change

One of over 200 bills pushed through the legislature in less than a month was a big change to an existing law that provided protection to borrowers in some cases against a deficiency judgment when their property went through foreclosure. Below is some background information on the legislation that has the lending and real estate industries a buzz with its intended and unintended consequences.

SB 1271 - Serious Changes to Arizona's Anti-Deficiency Statute

SB 1271 was sponsored by Senator Sylvia Allen, a REALTOR® from the White Mountains area of our state. The legislation started out in January as a bill dealing with jail districts and property tax limits. In June a strike-everything amendment gutted the original bill and changed its direction entirely. The Arizona Bankers Association argued successfully that the changes provided in the legislation were necessary because abuses in the current law were costing Arizona-based banks millions in losses. There was significant sympathy for the Arizona community banks in making the changes provided by this legislation. In other words, the legislators found it very easy to hold property investors liable for their debts while arguing that homeowners would still retain their deficiency protection if they lived in the home for six consecutive months. The legislation sailed out of the Senate by a unanimous vote but just barely received enough votes to pass the Arizona House of Representatives. The Governor signed the bill on the last day to sign or veto the legislation.

The current law - Arizona Revised Statutes (A.R.S.) § 33-814 currently states that within 90 days after the date of sale of a trust property under a trust deed, a legal action may be brought to recover a deficiency judgment against the borrower (trustor) who has now had their property foreclosed. The deficiency judgment must be for an amount equal to the sum of the total amount owed as of the date of the sale either by the fair market value of the trust property as determined by the court or the sale price at the trustee's sale, whichever is higher. The current law prohibits a lender from seeking a deficiency judgment against the trustor (foreclosed property owner) if the trust property is 2.5 acres or less and is used as a single one-family or single two-family dwelling.

The law effective September 30, 2009 - SB 1271 amended A.R.S. § 33-814 (G) to require that the trustor must have "utilized" the property for six consecutive months and a certificate of occupancy must have been issued. What does this likely mean? Various attorneys are opining different theories. My interpretation of the statute is that after September 30, 2009, properties sold at trustee's sale likely will not qualify for the anti-deficiency exemption unless the trustor lived in the single one-family or single two-family dwelling for at least six consecutive months. The legislative Fact Sheet, as transmitted to the Governor, states that SB 1271:

Prohibits a deficiency judgment against a trustor pursuant to a trustee's sale of a trust property that is 2.5 acres or less and is used as a single one-family or single two-family dwelling if both of the following apply:

* The trustor has lived in the trust property for at least six consecutive months.
* A certificate of occupancy has been issued for the property.

Places the burden of proof on the trustor to demonstrate that the statutory requirements to prohibit a deficiency judgment are met.

As before this law was passed, REALTORS® should advise their clients to consult legal counsel regarding the application of the anti-deficiency statute."

There is a good explanation here about deficiency judgments, from before this new statute was passed.

How to Amend Your Tax Return to Claim the First Time Home Buyer Tax Credit

If you purchase a home before December 1, 2009, for purposes of the first time homebuyer tax credit, you can treat the purchase as if it had happened on December 31, 2008. So you can claim the tax credit on your 2008 return by filing an amended return for 2008.

For the amended return, the 2 forms you need to file are:

1. The Amended U.S. Individual Income Tax Return (Form 1040X)
   
2. The First-Time Homebuyer Credit (Form 5405)
   

Additional info from the IRS page about amended returns:

• If you are filing to claim an additional refund, wait until you have received your original refund (you may cash that check).
  
• When filing the amended return, attach copies of any forms or schedules that are being changed as a result of the amendment including any Form(s) W-2 received after the original return was filed.
  
• Tax forms can be obtained by calling 800–829–3676 or visiting www.irs.gov
  
• Normal processing time for Forms 1040X is 8 to 12 weeks from the IRS receipt date.