Long time client is buying the trailer she lives in. Rent-to-own, title is to transfer when she makes the last payment. She would like to make the last payment with her tax refund. Trailer is in trailer park. She meets all other FTHB qualifications. My question is will her credit be based on her last payment or the entire amount of the Rent-to-own? She understands I will have to prepare an amended return to claim FTHB credit.
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Contract Terms
This is a tough one.
A couple questions come to mind:
(i) Is she purchasing just the trailer, or also the land (i.e., the lot on which the trailer is located)?
(ii) Is the trailer attached to a foundation? If so, it might be considered real estate. If not, it may be treated as a motor vehicle under state law.
As her principal residence, it qualifies her for the credit, even if the state law treats it as a motor vehicle. But I raised that question because it will affect how title to the property is transferred to her. And that determines what type of documents are involved.
As for your original question, you'll need to look at the terms of the rent-to-own contract, and you might want to get a lawyer involved at some point.
Does the contract say:
Or does the contract say:Mrs. T, I'm renting you this trailer for six years at a rate of $450 per month. If you make all those payments, then at the end of the six years, I will sell you the trailer for $450.
These are two very different arrangements. The second example involves less rental income for the seller over the life of the contract, but it involves reporting an installment sale. And it involves a higher purchase price for the trailer, which implies lower capital gain for the seller...Mrs. T, you are taking possession of this trailer for a term of six years. Throughout the six year term, you will pay me $200 per month in rent, and $250 per month in installment payments for the purchase of the trailer. When you have made the final payment, I will transfer ownership of the trailer to you.
The first type of arrangement is highly questionable, because it raises questions about whether the trailer is actually being sold for its true fair market value, among other things.
The IRS now requires submission of a copy of the closing statement with any claim for the homebuyer credit. This is why the client may need to get a lawyer involved. If the trailer is a motor vehicle, and the seller is simply going to sign the back of a car title document, then there won't be a closing statement.
In your capacity as an accountant, you might be able to draw up a bill of sale that will satisfy the requirement of a closing statement, but whatever you put on that bill of sale needs to be consistent with the terms of the rent-to-own contract...
On the other hand, if the trailer is considered real estate, or if your client is also buying the land underneath it, then there will have to be an attorney involved, because there will need to be a deed. In that case, the attorney can do the closing statement.
BMKBurton M. Koss
koss@usakoss.net
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The map is not the territory...
and the instruction book is not the process. -
Thank you.
Client pays lot rent. I will contact her to get a copy of the agreement. Thanks again.Comment
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Fthb
If client has been renting for say 10 years as a "rent to own", how would she be eligible for a FTHB? If she was eligible based on her paying final payment and title changing hands, wouldn't any homebuyer who has been paying on a mortgage for 30 years and makes the final payment be eligible?
Peggy SiouxComment
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Point well taken...
You raise an excellent question.
But I still say that whether the tax credit is available, and what the amount of the purchase price is, hinges heavily on the terms of the contract, and applicable state law.
"Rent-to-own" means a lot of different things to a lot of different people.
There is a massive difference between a lease with an option to buy and land contract.
With a lease-option, the tenant has the right, but not the obligation, to buy the property at a certain point in time during the lease, or at the conclusion of the term of the lease. In this type of contract, the tenant has no ownership of the property at all until and unless they exercise the option and make the purchase.
In a land contract, sometimes called a contract for deed, the purchase is completed when the contract is signed. The buyer does not receive a deed, but they hold equitable title to the property. They are no longer considered a tenant, and in most states, landlord-tenant laws are not applicable. They are obligated to make all the payments, just like a mortgage. There is no option; they cannot walk away from the deal.
With a lease-option, the purchase occurs when the tenant exercises the option, and this is usually at the end of the lease. With a land contract, the purchase occurs when the contract is signed.
A land contract, for purposes of the homebuyer credit, works exactly like a mortgage.
A lease-option is exactly the opposite. The purchase does not take place when the lease begins, but rather when the buyer chooses to exercise the purchase option.
A buyer who exercises such an option during 2009 will be eligible for the tax credit.
The client described in the original post may have a lease-option, or they may have a land contract...
BMKBurton M. Koss
koss@usakoss.net
____________________________________
The map is not the territory...
and the instruction book is not the process.Comment
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Burton: Regarding "lease-to-own" deals and trailer lots
Thanks for furnishing this answer on "lease-to-own" FTHB credit -- I had been looking for this.Originally posted by Koss View Post
About the above question of "Is the trailer lot included in the purchase price for FTHB credit?"-- IT IS. See below link to IRS question and answer sheet (halfway down the first page):
Q. "If a taxpayer purchases a mobile home with land and qualifies for the credit, is the amount of the credit based on the combined cost of the home and land?"
A. "Yes. The first-time homebuyer credit is ten percent of the purchase price of a principal residence. The total purchase price (mobile home and land) is used to determine the amount of the first-time homebuyer credit."Comment
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I agree with Peggy...if this isn't a home that is purchased in full this year I don't think the credit applies.Originally posted by peggysioux View PostBelieve nothing you have not personally researched and verified.Comment
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