First-time homebuyer credit allowed for equitable owner

The Tax Court held that a taxpayer could claim a first-time homebuyer credit for a house he didn’t occupy or hold legal title to during the tax year. The taxpayer bore the benefits and burdens of ownership under state law, making him its equitable owner, and his intention to live in the home after renovating it met the credit’s requirement, the court held.


In December 2008, Joseph M. Woods Jr. entered into a contract for deed to a home near Dallas. Under terms of the agreement, Woods took possession of the house and paid a down payment. He also agreed to pay property taxes and make monthly payments with interest to the seller for 184 months. After that time, the seller would convey title to the property to Woods.


On his 2008 federal income tax return, Woods claimed the full amount of the first-time homebuyer credit, which then was a maximum credit of $7,500 that had to be repaid to the government over 15 years (soon afterward increased to $8,000 without any repayment requirement). However, by the end of 2008, Woods had not yet lived in the house, which needed renovations to make it habitable. Woods planned to finance the renovations with the proceeds of his income tax refund, including the homebuyer credit. In March 2009, after receiving the refund, he began renovations. In August 2009, the IRS issued a deficiency, saying Woods had been ineligible for the credit. Woods petitioned the Tax Court.


Sec. 36(a) allowed the credit (it expired in 2010) for individuals who were first-time homebuyers of a principal residence purchased in the United States. The IRS argued that (1) Woods was not the property’s legal owner and therefore not a purchaser; and (2) because he did not live in the home during 2008, it was not his principal residence.


The Tax Court applied Texas law to determine whether property rights transferred to Woods made him the home’s purchaser. A contract for deed had been held by the Texas Supreme Court in Criswell v. European Crossroads Shopping Center, Ltd. (792 S.W.2d 945 (Tex. 1990)) to effect a change of ownership making a purchaser the property’s equitable owner where the seller retained only “bare legal title, more in the nature of security to guarantee payment than anything else,” a situation similar to that of the instant case, the Tax Court held.


Although Sec. 36(c)(2) provides that “principal residence” has the same meaning with respect to the homebuyer credit as in Sec. 121, the purposes of the two Code sections are “fundamentally different,” the court said. In contrast to Sec. 121, which looks back for purposes of determining gain on disposition, the homebuyer credit was prospective, requiring residence during a recapture period. The court accepted Woods’ testimony that he intended to use the home as his principal residence and held he was entitled to the credit.


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