Does Buying a Home From Owner to Owner Count as a Tax Credit?

Owner to Owner Land Contract

When a seller agrees to finance the sale of a home, the parties enter into what is usually referred to as a "land contract." A land contract sets forth the terms under which the seller agrees to sell the property, such as the purchase price and monthly payment amount. The buyer pays the seller each month instead of paying a bank or finance company. State laws vary with regard to how land contracts are viewed from a legal perspective; however, in most states, a land contract is afforded the same legal protections that a borrower has with a conventional mortgage once a certain amount has been paid toward the purchase price of the property.

The federal government initiated a first-time buyer tax credit program in 2008. The program was extended through 2009 and 2010. Military buyers have an additional extension through 2011. You must qualify as a first-time buyer, have income below the income threshold and meet other criteria to claim the credit. There is no preclusion for homes purchases on land contracts. If you did not purchase a home in time to qualify for the federal program, check with your state tax authority, as many states also provide similar tax credit programs. A tax credit allows you to reduce your tax liability by the amount of the credit.

Along with a potential tax credit, purchasing a home can provide you with a tax deduction for the interest you paid throughout the year on the balance due. Unlike the tax credit program, the ability to deduct interest paid on a home loan is not a temporary program. A home purchased by land contract does qualify as long as you paid interest during the year. A deduction allows you to reduce your taxable income by the amount of the deduction.

The federal tax credit can be claimed by completing IRS form 5405 for the appropriate year. To claim an interest deduction, you must itemize deductions on Schedule A and attach it to your IRS 1040. While a traditional lender will send you an interest statement at the end of the year without asking, you may need to ask the seller under your land contract to provide you with a statement.