In this iteration, the case turns on when the taxpayers assumed the “benefits and burdens” of home ownership.
Benefits and burdens is a concept found in various internal revenue code provisions, including the domestic manufacturing deduction (section 199), interest deductions on home mortgage loans, and the home sale exclusion.
For real property, the benefits and burdens of ownership are entwined with legal or equitable ownership. You become the equitable owner of property when you assume the benefits and burdens of ownership, and a sale is generally considered to have occurred at the earlier of the transfer of legal title or the practical assumption of the benefits and burdens.
In T.C. Summary Opinion 2014-77 (Jeffers), the taxpayers acquired a home in 1993 from an individual seller under an installment contract. They made the final payment on the contract in December 2008 and legal title was transferred in February 2009. They claimed the first-time homebuyer credit on their 2009 return, the year they received title.
The IRS says the benefits and burdens of ownership shifted in 1993 when the taxpayers entered into the installment sale contract and that they were not entitled to the first-time homebuyer credit.
The tax court analyzed seven benefits and burdens associated with ownership to determine the outcome.
(1) A right to possession
The taxpayers had the right to possess the property during the life of the contract. The contract stipulated they would obtain the right of possession after they refinished the hardwood floors, recarpeted some of the bedrooms, and renovated the main bathroom. The taxpayers completed those tasks in 1993.
(2) An obligation to pay taxes, assessments, and charges against the property
The contract required the taxpayers to pay one-twelfth of the annual property tax. Part of each monthly payment went toward their portion of the property tax liability. The taxpayers argue their obligation to pay a portion of the property tax did not represent a burden of ownership because the seller was ultimately responsible for paying the tax.
(3) A responsibility for insuring the property
The contract also required the taxpayers to pay one-twelfth of the annual property insurance premiums. A portion of each monthly payment went toward this obligation. The taxpayers argue their obligation to pay a portion of the insurance expenses did not represent a burden of ownership, because the seller was ultimately responsible for paying the premiums.
(4) A duty to maintain the property
The contract did not assign the duty to maintain the property, but the seller refused to make any repairs, even those that were necessary to keep the home habitable. The taxpayers also maintained the property’s lawn and landscaping during the term of the contract.
(5) A right to improve the property without the seller’s consent
Under the terms of the contract the taxpayers had no right to improve the property without the seller’s consent. The contract stipulated that the taxpayers had to obtain the seller’s permission any time they wanted to make even a minor change to the property.
(6) A bearing of the risk of loss
The contract allocated the risk of loss to the taxpayers. They would have had to continue making monthly payments even if the house had been destroyed.
(7) A right to obtain legal title at any time by paying the balance of the full purchase price
The taxpayers had the right to demand title from the seller upon payment of the full purchase price. The contract required the seller to deliver the deed within ten days of full payment and the taxpayers could pay the remaining balance at any time without penalty.
THE COURT’S DECISION
For the IRS.
Our analysis of these factors demonstrates the taxpayers acquired an equitable interest in the property in 1993. Although some of the benefits and burdens did not shift until later, those that shifted in 1993 were significant enough to give the taxpayers an ownership interest at that time.
We hold that the taxpayers had an ownership interest in the property beginning in 1993. Because they did not purchase the house between April 9, 2008 and December 1, 2009, they are not entitled to the first-time homebuyer credit.