IRS issues revised form reflecting extended and expanded first time homebuyer credit

In a news release, IRS has announced the release of the revised Form 5405, First Time Homebuyer Credit and Repayment of the Credit, that taxpayers need to use to claim the first-time homebuyer credit (FTHTC) in 2009. Processing of these returns will begin in mid-February. IRS also announced new documentation requirements to deter fraud related to the FTHTC.

Background. The FTHTC available under Code Sec. 36, which was to have expired for homes purchased after Nov. 30, 2009, was extended and expanded by the ''Worker, Homeownership, and Business Assistance Act of 2009'' (the Act, P.L. 111-92). As explained in more detail at Weekly Alert ¶  1 11/12/2009, the Act made these changes to the FTHTC:

... It extended the FTHTC to apply to a principal residence bought before May 1, 2010; it also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010. Certain service members on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit; they also can avoid the recapture rules under certain circumstances.

... For purchases after Nov. 6, 2009, a taxpayer (i.e., a “long-time resident”) may claim the homebuyer credit if he (and, if married, his spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that the taxpayer buys the subsequent principal residence. The maximum allowable homebuyer credit for such taxpayers, who are treated as first time homebuyers for purposes of the FTHTC, is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.

... For purchases after Nov. 6, 2009, the FTHTC phases out over much higher modified AGI levels: for individuals, the phaseout range is between $125,000 and $145,000, and for those filing a joint return, it's between $225,000 and $245,000.

... For purchases after Nov. 6, 2009, the FTHTC cannot be claimed for a home if its purchase price exceeds $800,000.

... A number of anti-abuse provisions apply for purchases after Nov. 6, 2009. For example, dependents can't claim the FTHTC; a purchaser must be at least 18 years of age on the date of purchase; and the definition of a qualifying purchase for FTHTC purposes is amended to exclude property acquired from a person related to the person acquiring the property or the spouse of the person acquiring the property, if married.

New form released.IR 2010-6, alerts taxpayers to the release of new Form 5405 (Rev. December 2009) and Instructions reflecting the major changes made to the homebuyer credit by the Worker, Homeownership, and Business Assistance Act of 2009. With the release of Form 5405, eligible homebuyers can now start to file their 2009 tax returns. Taxpayers claiming the homebuyer credit must file a paper tax return because of the added documentation requirements.

RIA observation: At the end of November 2009, IRS issued IR 2009-108, which announced that the revised Form 5405 was expected out soon. It stated that taxpayers claiming the credit on their 2009 returns, no matter when the residence was purchased, must use the revised Form 5405. However, a taxpayer who purchased a home on or before Nov. 6, 2009, and elected to claim the credit on an original or amended 2008 return could continue to use the then-current (unrevised) version of Form 5405.

Normally, it takes about 4 to 8 weeks to get a refund claimed on a complete and accurate paper return where all required documents are attached. But for homebuyers filing early, IRS expects the first refunds based on the homebuyer credit will be issued toward the end of March (i.e., taking an additional two to three weeks).

IRS expects to start processing 2009 tax returns claiming the homebuyer credit in mid-February after it completes the updating and testing of systems to meet the law's new rules and requirements. The updates allow IRS to put in place critical systemic checks to deter fraud related to the homebuyer credit.

While taxpayers cannot file electronically and must file paper returns because of the new documentation requirements, IRS notes that they can still use IRS Free File to prepare their returns; such returns must be printed out and sent to IRS, along with all required documentation.

In addition to filling out Form 5405, taxpayers must include with their 2009 tax returns one of the following documents in order to receive the credit:

... A copy of the settlement statement showing all parties' names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.

... For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price and date of purchase.

... For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner's name, property address and date of the certificate.

The Instructions provide that additional documentation will also be required if the purchased date is after April 30, 2010, and before July 1, 2010, and the taxpayer entered into a binding contract before May 1, 2010, to purchase the home before July 1, 2010. To avoid delays in processing their returns and receiving a refund, taxpayers have to attach a copy of the pages from the signed purchase contract showing all parties' names and signatures, the property address, the purchase price, and the date of the contract.

To qualify for the credit for long-time residents, taxpayers must show that they lived in their old homes for a 5-consecutive-year period during the 8-year period ending on the purchase date of the new home. IRS, which has stepped up compliance checks on homebuyer credit claims, encourages “long time residents” who are claiming the FTHTC to avoid refund delays by attaching the following documentation covering the 5-consecutive-year period:

... Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,

... Property tax records, or

... Homeowner's insurance records.

References: For the first time homebuyer tax credit, see FTC 2d/FIN ¶  A-4270 ; United States Tax Reporter ¶  364 ; TaxDesk ¶  568,850 ; TG ¶  1470.

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