New HomeBuyer Credit Form and Doccumentation Requirements

The Internal Revenue Service has released the new form, its instructions, and doccumentation requirements that eligible homebuyers must use in order to claim either the first-time homebuyer credit or the Repeat Homebuyer Tax Credit this tax season.

The new form and instructions follow major changes in November to the homebuyer credit by the Worker, Homeownership, and Business Assistance Act of 2009. The new law extended the homebuyer credit to a broader range of home purchasers and added new documentation requirements to deter fraud and ensure taxpayers properly claim the credit.

With the release of Form 5405 First-Time Homebuyer Credit and Repayment of the Credit, and the related instructions, 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.

Processing of 2009 tax returns claiming the homebuyer credit is not expected to begin until mid-February after it completes the updating and testing of systems to meet the law’s new requirements. The updates allow the IRS to put in place critical systemic checks to deter fraud related to the homebuyer credit. The IRS has identified 582 taxpayers who were under 18 years old and ineligible to buy a home claimed almost $4 million in credits with at least one 4-year-old receiving the credit.

Early taxpayers claiming the homebuyer credit can expect their refunds take an additional two to three weeks. Normally, it takes about four to eight weeks to get a refund claimed on a complete and accurate paper return where all required documents are attached.

In addition to filling out a Form 5405, all eligible homebuyers 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.

In addition, the new law allows a long-time resident of the same main home to claim the homebuyer credit if they purchase a new principal residence. To qualify, eligible taxpayers must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. The IRS has stepped up compliance checks involving the homebuyer credit, and it encouraged homebuyers claiming this part of the credit to avoid refund delays by attaching documentation covering the five-consecutive-year period:

• Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
• Property tax records or
• Homeowner’s insurance records.

The IRS also reminded homebuyers that the new documentation requirements mean that taxpayers claiming the credit cannot file electronically and must file paper returns. You may still use off-the-shelf tax software or you can still use IRS Free File to prepare your returns, but the returns must be printed out and sent to the IRS, along with all required documentation.