After yesterday’s blog broadcast about How To Legally Get The First Time Home Buyer Tax Credit On A Rent To Own Home Deal my email in-box got bombarded with a myriad of questions surrounding lease purchase and lease to own contracts and how to legally get the First Time Home Buyer Tax Credit if you are presently in a home with one of these contract structures.
Read the actual question and answer below:
Question:
Hey Vincent are u saying we can not claim the tax under a lease purchase or deal?
My wife and I put $6000 dwn last May on our house. Owner sale$ 239,000 24 months Lease Purchase. We must secure financing by May 2011?
Do we get the tax credit?
Thanks, Jeff
Answer:
Jeff, unfortunately, if your contract structure is a lease purchase, technically you do not have a sale. You have a lease agreement and a separate purchase agreement. Under this type of contract, you are classified as a tenant, not a buyer or owner. Lease to own homes contracts do not qualify as a bona fide sale under the IRS installment sales contract guidelines. As a result, you do not legally qualify for the federal First Time Home Buyer Tax Credit of $8000 or, assuming you are in Georgia, the state tax credit of $1800. Additionally, you cannot legally deduct your payment, or any portion thereof, on your tax return to reduce your tax liability. So, the answer is no. Under your lease to own contract, you do not legally qualify for the tax credit.
The Good News:
Jeff, the good news is this, fortunately, you contacted me before it is too late. If you meet the other qualification requirements, we can help you legally get the federal First Time Home Buyer Tax Credit of $8000 or, assuming you are in Georgia, the state tax credit of $1800 and help you legally deduct your payment on your tax return to reduce your tax liability. We can do this by simply changing your lease to own agreement structure to one that is in compliance.
Once the new contract is executed, the benefits to you are:
$8000 in cash back from the IRS in a few weeks once your present tax return or amended tax returns are filed. This assumes that you don’t owe taxes. If you do, the back taxes will be deducted from the $8000 credit and you will receive the difference. The last one of these we processed took 3 weeks before the buyer received the direct deposit of $8000.
If the contract date was retro-acted to your original contract date, you would also qualify for the $1800 state of Georgia tax credit, assuming you are in Georgia. Unfortunately, in their infinite wisdom, the state of Georgia decided to make this credit as a credit against state tax liability broken up into three $600 increments. But, any tax credit is a good tax credit.
If you qualify, you will also be able to write off 100% of your monthly payment against your federal tax return. On a $239,000 home, you are probably paying somewhere between $1300 and $1600. Assuming you are in the 25% tax bracket, this has the ability to either increase your monthly take home pay by as much as $400 if your W-4 withholdings are modified correctly or increasing your tax refund in 2011 by as much as $4800.
So, in your case, the actual tangible cash benefit to you by a simple contract change means you could realize as much as $14,600 in tax credits. Wow! That’s a lot of cash for a simple document change.
Now you understand why we constantly proclaim that all rent to own and lease to own companies are not created equal. One other thing, you never mentioned anything about what you were doing to restore your credit so you could qualify for a mortgage by May 2011 so you could actually own the home in your own name and not lose your $6000 down payment. You may want to check out the program we developed to help buyers get fast tracked for mortgage qualification at Credit Repair College. It is credit restoration on steroids and it empowers you to take control of the situation by providing you with live videos of exactly what you need to do, how to do it and provides you with the forms, letters, scripts, etc., to do it quickly. Failure to repair credit is a big reason why most lease to own home tenants never actually purchase the home they get into.
As always, federal law requires that I inform you that I am NOT a CPA or tax attorney (and don’t want to be) and I am NOT dispensing tax or legal advice without a license. With over 90,000 pages in the current IRS code, you should always consult a qualified professional as it relates to your individual situation.
So, to summarize, if you are presently in a lease purchase or lease option contract and you want to qualify for the federal First Time Home Buyer Tax Credit of $8,000, you must change the contract to one that is in compliance with the IRS installment sales contract guidelines. If you would like help with this, we have put together two new programs that will help you get into the correct contract structure:
CLICK HERE FOR HELP CONVERTING YOUR CONTRACT SO YOU CAN GET THE FIRST TIME HOME BUYER TAX CREDIT
If anyone else has any additional questions regarding this or lease to own agreements in general, simply ask them in the comment box below and we will get them answered.
{ 9 comments… read them below or add one }
I would like to have a phone number to reach you
1. Can a lease/purchase type contract be written now and still qualify for the tax credit?
2. Can the tax credit be used toward the down payment on a lease/purchase contract?
Tim:
Not to split hairs or get into semantics, but lease options and lease purchases do not qualify for the tax credit. The contract structure has to be either a contract for deed, land contract or installment sales contract that is specifically in compliance with the IRS' Installment Sales Contract Guidelines (which ours are). So, yes, a "lease/purchase type" contract can be written now and qualify you for the tax credit IF, and this is a big IF, it is either a contract for deed, land contract or installment sales contract that is specifically in compliance with the IRS' Installment Sales Contract Guidelines. If it is a standard lease purchase agreement, it will not qualify for the tax credit.
To answer your other question, yes, with us, the tax credit can be used towards the down payment requirement utilizing our Down Payment Assistance Program. The caveat here once again is that the contract you will sign will be a contract for deed, not a lease purchase contract and obviously, you will need to qualify for the tax credit.
I hope that helps. Let me know if we can help you.
We entered into an agreement dated 4/14/2010 and took possession of the home after 6/1/2010. The agreement we signed is titled " Lease Agreement with Option to Purchase, Seller Financed". In this agreement we are required to apply for the first time home buyers credit and give it to the "seller", we are required to pay the homeowners taxes, keep homeowners insurance on the house/property, have the right to construct improvements and have the duty to maintain the property. When we amended our 2009 tax refund to apply for the tax credit our tax preparer had several concerns regarding this "agreement". This "purchase" is not recorded with the county, the agreement is not notarized. She was pretty sure that this would NOT qualify for the tax credit. I have yet to mail this in. I have found that "Lease agreements with Option to Purchase" do NOT qualify BUT seller/owner financed transactions do. ??? Where do I fall in all of this? And to top it off I was served notification yesterday that this house is in foreclosure!!! So now I have to question the repayment of the tax credit if you do not maintain the home as your principal residence. I will be responsible to pay this back when the money was given to the seller/owner. Sorry to make this so long but any advise you can give me will be greatly appreciated. I do have an appointment with an attorney as well. Thanks
Tina:
First, I am sorry to hear about what you are going through and I apologize for the delayed response. We get bombarded with spam comments and yours got buried in the pile. To answer your questions, yes, you are correct, lease option agreements do NOT qualify for the First Time Home Buyer's Tax Credit because they are not in compliance with the IRS Installment Sales Contract Guidelines. So, you don't have to worry about paying the tax credit back because the IRS will never fund it to begin with. Obviously, if the home is in foreclosure, you don't give anyone any additional money. If you haven't already, it is time to start looking for another home because unless the seller pays the past mortgage payments, the home is going to end up in foreclosure and the bank will begin the eviction process shortly after the foreclosure sale (assuming no one outbids them). Let me know if we can help you.
I have a 'Lease With Option" contract executed 1-20-11. It was prepared by a real estate attorney and contains legal description, plus P. O. street address. Terms are for 30 years and require a monthly payment of $1,094.44 (principal and interest = $900.00; propery taxes = $149..02 monthly; Insurance = $67.52 monthly. The contract designates that $45.00 monthly of payment "shall be applied towards the purchase price." The contract includes a notarized, signature page by all parties. Total purchase price = $196,000
Is there a method whereby we can utilize the First Time Homebuyers credit, using the "Long Time Resident" feature. We qualify for it along with the financial requirements.
Thanks for your help.
Ben & Sissie Carlton
Ben & Sissie:
Lease Option contracts are not in compliance with the IRS Installment Sales Contract Guidelines, do not constitute a bona fide sale and do not qualify for either the First Time Home Buyer Tax Credit or the interest and tax deduction. If an attorney actually prepared it as you described, he/she didn't know what they were doing and doesn't understand real estate contract law. Under a lease option, you have two separate agreements, a lease agreement and an option agreement. The lease agreement makes you a tenant, not owner or buyer, and nothing else though from your description the attorney has placed the landlord in great jeopardy by conveying equitable interest to you in a tenancy situation. Under a lease, no portion of your payment is technically principal or interest, it is merely a lease payment. Something is wrong with either your contract or the description thereof. As an example, in one part you mention that $900 is principal an interest (but don't mention how much principal you would be getting applied towards principal balance reduction (which you wouldnt get in a lease payment but……) and in another part you say that you are getting $45.00 towards the purchase price (presumably this is a rent credit defined in the option agreement).
In any event, if this contract is a lease option, this contract doesn't qualify you for the tax credit or tax deduction because it isn't in compliance with the IRS Installment Sales Contract Guidelines (though it sounds like a de facto sale has taken place) and it wasn't executed prior to April 30th, 2010.
What you need is our Contract Conversion so you can at least deduct the payment, reduce your insurance costs and legally be classified as an owner. Http://www.financethedream.com/first-time-home-bu…
Feel free to call, email or reply to this comment if you have further questions.
What you need is our <a href="http:// wwww.financethedream.com/first-time-home-buyer-tax-credit” target=”_blank”>Contract Conversion
Thanks for your comments. What about irs.gov/newsroom/article/O,,id=206291.html. This document suggest that if taxpayer maintains "benefits and burdens" of ownership in a seller financing arrangement, then the taxpayer can claim the homeowners credit even though the seller retains legal title. This is under lease/option contract situations. Factors are: (1). Right to obtain legal title upon full payment of purchase price (2). Right of possession (3). Pay property taxes (4). Right to construct improvements (5). risk of loss (6). insure property. (7). maintain property. All these factors are mentioned in the contract. Your thoughts. Thank you again.
Ben & Sissie:
First, let me state that you have a great deal going on with your contract and understanding thereof and as always, you should seek professional advice from you CPA or tax attorney in matters related to taxes. Having said that, the link to the article you reference isn't working so I cannot directly comment on what it says having not read it. The numbered points you bring out are all contained in the Installment Sales Publication 537. Secondly, as previously indicated, you don't presently have a seller financing arrangement according to IRS language, you have a lease agreement with an option to purchase, according to what you previously stated. What you have presently is a landlord/tenant relationship and a tenancy agreement, not a seller/buyer relationship and purchase and sale agreement (according to what you have stated, remember, I haven't seen your contract). Further, you are trying to pull together several formulas to make this work, e.g., the long time resident feature which applies to owners of properties, not tenants. The IRS requires documentation proving your long time residence status (read prior OWNERSHIP) of a home for 5 of the prior 8 years as:
1. Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
2. Property tax records or
3. Homeowner’s insurance records
It wasn't clear to me if you owned a home prior to your new contract and I am unclear as to your actual contract date because you indicated you signed it on January 20th, 2011. Did you mean 2010?
With respect to the comment about the seller retaining legal title, this is another big misunderstanding that most people have.
Presently, both you and your landlord have legal title. People often confuse the difference between deed and title as it relates to real estate because they think that a title is a paper document that documents and conveys ownership interest like it does with a vehicle. Not so. For real estate, the deed conveys ownership interest. The deed is a paper document. The title is merely a bundle of rights associated with a property, i.e., nothing but air, but enforceable in a court of law. Presently, you have title to the property, as in, you have a bundle of rights associated with your contract and occupancy. Your landlord also has title. Your landlord also presumably has the deed to the property. Incidentally, according to what you indicated, your attorney either knowingly or unknowingly conveyed equitable interest in the property to you and created a de facto sale even though they used a lease option agreement. What they should have done was simply use any one of the documents that the IRS recognizes as a bona fide sale for tax purposes which are: contract for deed, land contract or installment sales contract so you could have qualified for the $6500 or $8000 tax credit, your state tax credit if applicable and had the ability to legally deduct the portion of your payment that is interest and property taxes. But, hey, that's what you get for $400 an hour from someone with a J.D. behind their name.
In any event, painfully, here's my prediction:
You can submit all of your documentation and attempt to apply for the First Time Home Buyer Tax Credit but I am afraid that it is probably going to get rejected due to the type of contract even though a lot of the verbiage sounds like it should qualify. All they can do is say no. Those two bold words at the top of the documents, LEASE & OPTION, are going to be the ammunition they use to blow your argument out of the water. As many of our clients will tell you who have actually received the $8000 credit, the documentation they had to provide was extensive (because the IRS doesn't want to give out the money) and many of their CPAs wrongfully told them that they couldn't get the credit or deduct the payment until we provided them the actual IRS publications proving otherwise.
In any event, like I said, you can submit your documentation and see if they will accept it. All they can do is say no. Hopefully, in a few weeks or a few months you can reply to this thread and tell me how wrong I am and that you two are on a cruise enjoying the tax credit money. I would like to be wrong for your sake. If I am not, since you have all the burdens of home ownership, if I were you, I would use our Contract Conversion feature and get your contract converted so you can at least legally deduct the monthly interest and property tax payments.
{ 3 trackbacks }