First-Time Homebuyer Tax Credit Denied Due to Timing of Seller-Financed Contract.
(Parker Tax Publishing January 14, 2015)

The Tax Court held that a taxpayer acquired equitable title to a residence property when she entered in to a seller-financed contract and took on the benefits and burdens of ownership, rather than when delivery of the deed was completed years later. Because the contract was executed prior to window of time during which the first-time homebuyer credit was available, the taxpayer was not eligible for the credit. Wodack v. Comm'r, T.C. Memo. 2014-254 (12/17/14).

Background

In 1993, Rose Wodack entered into a seller-financed land contract with Howard Schlise for a tract of land and a residence. Under the contract, Wodack would pay Schlise an initial amount and make monthly payments towards satisfying the purchase price over a five-year term. The contract allowed for extensions with 30 days' notice and a recalculation of the interest rate.

Wodack was required to pay Schlise annual property taxes, special assessments, and fire and other required insurance premiums. In return, Wodack had the right to take possession of the property at the time of the closing and could improve the property without permission. She resided at the property, made timely monthly payments, and renewed the land contract for two additional five-year terms without issue. In 2006, Schlise passed away and his interest in the property passed to the Schlise Family Trust.

In 2008, when the Schlise Family Trust denied Wodack's request for another contract renewal, she secured a loan and paid the balance owed in full upon the expiration of the contract period. The Schlise Family Trust then transferred the deed to Wodack in November of 2008. On her 2008 tax return, Wodack claimed a first-time homebuyer credit. The IRS issued Wodack a notice of deficiency disallowing this credit, claiming the sale took place in 1993 when she entered the contract. Wodack petitioned the Tax Court for redetermination.

Analysis

First-time homebuyers of a principal residence are entitled to a credit of 10 percent of the purchase price, not to exceed $7,500 (Code Sec. 36(a)). The taxpayer must have purchased the home on or after April 9, 2008, and before July 1, 2009 (Code Sec. 36(h)). The term "purchase" is defined as "any acquisition" (Code Sec. 36(c)(3)). Generally, a transfer is complete upon the earlier of the transfer of legal title, such as a deed, or the practical assumption of the benefits and burdens of ownership. State law controls the determination a taxpayer's interest, while the tax consequences are determined by Federal law. Woods v. Comm'r, 137 T.C. 159 (2011).

Wodack argued the purchase occurred in November 2008 when she paid the Schlise Family Trust the remaining balance under the land contract and received the deed to the property. The IRS argued that, for tax purposes, the purchase occurred on August 3, 1993, the effective date of the land sale contract, when Wodack acquired equitable title and took on the benefits and burdens of the property.

In determining the purchase year, the Tax Court applied Wisconsin law to conclude that Wodack became the equitable owner of the property when she took on the benefits and burdens of ownership. The court noted that the 1993 contract granted Wodack the benefits of right of possession, right to obtain legal title by paying the remaining balance, as well as the burdens of property taxes, assessments, insurance, maintenance and risk of loss. As she had become the equitable owner of the property in 1993, the court determined that, under the meaning of Code Sec. 36(c)(3), Wodack had purchased the property at that time.

The court rejected Wodack's assertion that the purchase occurred in 2008 when she received the deed after paying off the remaining balance on the contract. The court viewed the Schlise Family Trust as holding only bare legal title after the effective date of the contract, concluding the deed was merely security for the unpaid balance. Consequently, Wodack did not "purchase" the property when she received the deed. Because the purchase occurred in 1993, outside the permissible time frame under Code Sec. 36(h), the court held that Wodack was not entitled to the first-time homebuyer credit.

For a discussion of the first time homebuyer credit, see Parker Tax ¶ 102,700. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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