LAND INSTALLMENT CONTRACT/TAX CREDIT PROGRAM
Thank you for your interest in the Land Installment Contract/Tax Credit Program. We hope the information offered here will be helpful to you.
Q. What is a "Land Installment Contract"?
A. A Land Installment Contract is an agreement with a Seller of real estate whereby you purchase the Seller's property "in installments." Specifically, by making monthly installment payments over a period of time, you build up equity toward eventually receiving "full title" to the property.
Q. Are Land Installment Contract's protected and governed by any types of laws in Ohio?
A. Yes. Land Installment Contracts are governed by Ohio Revised Code Chapter 5313 - here is a link to the law: http://codes.ohio.gov/orc/5313 Land Installment Contracts have been "legal" in Ohio since 1969. Among other things, your Land Installment Contract is "recorded" with the County Recorder so that no liens can interfere with your right to obtain clear title to the property upon your final payment.
Q. What is the difference between a traditional "Lease" and a Land Installment Contract?
A. There are several important differences.
First, under a Land Installment Contract, you are responsible for all maintenance of the home, and for taxes and insurance. After all, it's "your" home, even though you won't receive the "full" title until you pay off the balance of the Land Installment Contract.
Second, you are entitled to receive the same tax deductions available to "traditional" home owners - you can deduct the real estate taxes and the "interest" portion of your monthly payments from your Federal income taxes.
Third - until you have paid 20% of the principal amount of the purchase price, or until you have been under the Land Installment Contract for 5 years, whichever comes first, - in the event of your default you need to know that you can be evicted from the property in a manner which is similar to a Lease tenant. After you have either paid 20% of the principal amount of the purchase price or have been under the Land Installment Contract for 5 years, your Seller cannot recover the property without a full "foreclosure" procedure.
Q. Can you give me an example of what my monthly payments might be, and the tax benefits - both from the First Time Homeowner program and "ongoing" tax benefits?
A. Let's take the example of an $80,000.00 house, with taxes at $2,400.00/year, with Land Installment Contract interest rate of 8.0%. (The check from the IRS is explained below and on the next page).
$72,000.00 Amount financed by Seller ($80,000 - $8,000)
$528.31 monthly principal and interest
$200.00 real estate taxes (monthly)
$ 75.00 Insurance (monthly)
_____________________
$ 803.31 Subtotal
- 101.73 Net ongoing tax benefits* (not including the $8000 government check)
____________________
$701.58 Net monthly cost of ownership
* "Net ongoing tax benefits" assumes you are in the 15% tax bracket - if you are in a higher bracket, it gets even better.
$2400.00 real estate taxes
$5738.27 annual interest portion of payments (first year - goes down very slightly each year)
_________
$8138.27 x 15% = $1,220.74/ 12 months = $101.73/month
Q. How does the First Time Home Buyer Tax Credit Help Me? Do I really get a check from the IRS for (up to) $8,000.00?
A. Yes. The IRS has ruled that Land Installment Contract's qualify for the First Time Home Buyer Tax Credit - see http://www.irs.gov/newsroom/article/0,,id=206291,00.html (10th item from the top).
You are entitled to receive a tax credit of 10% of the purchase price under the Land Installment Contract - so in the above example, the IRS will issue you a check for $8,000.00. The maximum credit is 10% of the purchase price, up to an $80,000.00 purchase. If the house is $90,000.00, your check will be still be $8,000.00.
Specifically, you will file an amendment to your 2008 tax return, using IRS form 1040X (we help you with this). Assuming you have already paid your 2008 taxes, you will receive a CHECK for $8,000.00.
Q. What if my 2008 taxes were less than $8,000.00? What if I owed no taxes at all?
A. That doesn't matter. You will still receive the full $8,000.00. (Amazing, but true!)
Q. What if I haven't filed my tax return for 2008?
A. You must file your 2008 tax return. If you haven't yet filed, you must do so. (We can help you with this). If you owe money to the IRS, then, it will be deducted from the $8,000.00 and you will receive the difference.
Q Does "First Time Homeowner" mean I have never owned a house?
A. No. It really means you (and/or your spouse, if you are married) have not owned a house for three years prior to the Land Installment Contract.
Q. Do I get to put the entire $8,000.00 in my pocket?
A. Possibly - it depends on the "deal" you make with your Seller. Some Sellers will want the entire amount applied to the purchase price - which means you have automatically built up $8000.00 in "free" equity toward your final price. Other Sellers are willing to share the money with you, for you to spend as you please.
Q. What if I ultimately do not purchase the house?
A. If you decide not to complete the purchase of the house at that time after the first 3 years, you can surrender the house back to the Owner* with no penalty except for any damage beyond normal wear and tear to the property (and any "missed" payments).
You can also surrender the house earlier. However, if you surrender the house in less than 3 years (or your Land Installment Contract is terminated for non-payment), you must re-pay the IRS the full $8,000.00. Under no circumstances will you receive a refund of any money paid to the Seller.
Q. Are there any up-front charges?
A. Some Sellers will require 1-3 month's down payment, depending upon the house and your personal circumstances (such as your credit history). If so, this money is fully applied to your ultimate purchase price.
*A provision to surrender the house is optional, which may or may not be offered by your particular Seller.