The Internal Revenue Service finally released the rules for the repeat home buyer tax credit with key details that taxpayers have been missing since President Obama signed the legislation back in November when they created the expanded program.
This past January 15th the IRS posted the revised Form 5405 on their website (www.irs.gov). It's interesting to note that for the next six weeks, after the home buyer's tax credit was expanded, the IRS cautioned taxpayers not to file for this tax credit until the revised form and new instructions were released.
One of the rules to qualify for this newly expanded tax credit is that homeowners had to occupy the same property as their main, principal residence for any five consecutive years during the last eight years to claim a tax credit of $6500 on a purchase of another home that they intend to use as their primary residence.
The credit can be as high as 10% of the price of the replacement home and it is capped at $6,500. The purchase contract must be dated between November 7th, 2009, to April 30th, 2010, and the closing has to occur no later than June 30th, 2010.
Members of the armed forces and federal diplomatic and intelligence personnel stationed overseas get an extra year to claim the credit.
Furthermore the maximum purchase price for their new home cannot exceed $800,000 and buyers don't have to sell their previous home, but they have to be able to show that their new home is their main residence.
Key questions were answered by the new IRS guidance publication. One example was that they described what documentation home buyers had to submit along with their $6,500 credit claim. According to the IRS here is what has to be submitted in order to claim the tax credit on your 2009 and 2010 tax returns:
- Buyers should attach a copy of the signed HUD-1 settlement sheet, including the date of closing and contract sale price. This is to prove that the timing of the transaction meets the program's requirements.
- Buyers also need to provide evidence of their long-term ownership and occupancy of the previous home in order to meet the five consecutive years' test. This can be achieved through property tax records, homeowners' insurance records or IRS Form 1098 interest statements for the five-year period.
- Where a HUD-1 settlement sheet is not available such as on a newly constructed home, buyers claiming a credit should know that the IRS will accept a copy of the certificate of occupancy showing the buyers' names, the property address and date.
The new IRS information also explains the revised income limits for home buyers claiming credits. For an individual the modified adjusted gross income must be $125,000 or less, and for those who are married and filing jointly the modified adjusted gross income must be $225,000 or less. Anything above these limits, the credit amount begins to decrease in increments.
Beware that there are also some pitfalls to watch out for as well when claiming the tax credit. There was an advisory posted on the IRS's website recently that spelled out certain situations where recipients of tax credits may be required to repay the credit back to the government should they sell their new home within a 36-month period after its purchase. Also, if they convert their principal residence to a rental or business property, or if their lender forecloses on the home they will also have to repay the tax credit.
If you want to take advantage of this new tax credit you should be aware that there are only 14 weeks left to sign a contract and five months to close.
This article is for informational purposes only. Individuals should consult with qualified professionals on each individual's particular situation. This article should not be construed as legal advice.