Stimulus for Notes

Homebuyer Tax Credit & Seller Financing

Written by Jeffrey R. Armstrong – President/Owner of Armstrong Capital

Your favorite Master Note Buyer – Straightforward, Honest, Fair…

President Barack Obama signed into law earlier in the year (2009) the largest government economic rescue plan in the nation’s history, a $787 billion package of spending, tax cuts and tax credits that’s designed to help pull the nation out of what’s becoming the worst downturn since the Great Depression.

The American Recovery and Reinvestment Act includes everything from money to refurbish public housing to incentives for energy conservation. The 1,000-page plan aims to create and preserve jobs, and also to accelerate the transformation of key economic sectors.

While the plan provides some benefits directly to individuals, the main way it’s intended to help Americans is to promote economic activity nationwide. The stimulus is but one part of a multi-front attack by the government on the recession.

Other parts include the mortgage-relief program and the next phase of the bank bailout. They’re all intended to work together, along with efforts by the Federal Reserve to kick-start the economy. However, individuals will benefit most once the economy resumes growth rather than from the stimulus itself.

As far as the Note industry is concerned the major question has been can the buyer of a property use the first time homebuyer credit if the purchase of the house was seller financed?

In short, the IRS has specifically answered “YES” to this question.

It seemed pretty straight forward that seller financed transactions involving a seller financed note would let qualified buyers take the First Time $8,000 Homebuyer 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 seller financed mortgage or deed of trust.

This issue has been addressed in the IRS website.  It outlines that the buyer must meet the benefits and burdens of ownership and includes 7 test points.  Here is some of the explanation on the IRS website:

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.

You can review all of the information at:  http://www.irs.gov/newsroom/article/0,,id=206291,00.html

In the beginning of November an extension of the homebuyer credit was signed into law, along with an extension in unemployment benefits. It is interesting to note that the House and Senate passed the measure by votes of 403-12 and 98-0 respectively. Whether this is helpful or is just going to prolong the downturn is to be seen and totally speculative at this point.

The extension of the deadline for these credits is now April 30, 2010. However, if there is a binding contract in place by this date, closing can be anytime up to July 1, 2010. Anyone who hasn’t owned a home in the past 3 years is eligible for up to an $8,000 credit as before, but now anyone who has owned a home for at least 5 of the last 8 years and is now buying another home can get up to a $6,500 credit. The income cap has also been raised to $125,000 for individuals and $225,000 for married couples.

Though there was no limit on the price of the purchased home under the old program, under the extension the home purchased must be $800,000 or less. Also, under the old program a dependent could qualify, they cannot under the extension. Based on all the fraud that occurred, closing paperwork must now be attached to the tax return applying for the credit. Though this paperwork was not required under the old program, you are well advised to have the HUD-1 included with the return to speed up any refund. We will have to wait to get further details as the regulations still need to be written.

I hope this helps explain the homebuyer credit and how it relates to the seller financed note industry a little better.  Keep moving forward and make it a great month! TWITA!