In Latin as in romance languages verbs are conjugated upon the noun, Habito is for I, Ego habito (I live, yo vivo); Habitas for you singular (Tú vives), is or ea Habitat (he/she lives; él vive, ella vive). Spanish examples just to compare the conjugation. Also it can be: habitar in Spanish...
This is nothing to do with negative sentences. Apart from a very small number of other nouns (domus, rus and humus), use of the locative case is confined to towns and small islands. Italia is neither, so in followed by the ablative case is required.
See Places: to, from , and in for further information.