The federal income tax code provides for a refundable tax credit to a first-time homebuyer of a “principal residence.” In 2008, the year that Joseph took the
plunge and bought his first home, the credit was 10% of the purchase price, up to $7,500. When he claimed the maximum credit on his 2008 tax return, the IRS
came calling to challenge his eligibility for the credit.
First, the IRS said that Joseph did not qualify because he had acquired the home under a contract for deed, which is a type of land sale contract in which legal
title initially remains with the seller but “equitable title” passes to the buyer while he makes payments on the property. The U.S. Tax Court sided with Joseph,
finding that for purposes of the first-time buyer credit he “purchased” the home when he acquired equitable title under the contract.
The court also rejected a second argument by the IRS, that the credit was unavailable because during the relevant time period, the new home was not Joseph’s
“principal residence.” The only reason that Joseph had not occupied the residence yet was that some renovations were not finished, and this was not sufficient to
negate the principal-residence status of the property. Ironically, Joseph had been forced to suspend the renovations when he learned that the IRS had disallowed
the tax credit.