Complete Tax

By Robert Steere, Toolkit Staff Writer

It's not often that the IRS allows you to complete a financial transaction in one year and apply the tax benefit from the transaction to reduce your taxes in the prior year. But the first-time homebuyer tax credit is an anomaly, and these next few months may be the last, best chance to qualify for the credit. Not only can you get the $8,000 "first-time" homebuyer credit -- or the $6,500 credit "long-time resident" homebuyer credit -- but you can claim the credit on your 2009 tax return for an immediate tax benefit.

If you've been waiting to take advantage of the credit until you had further guidance from the IRS on how to qualify for and claim the credit, then wait no more. The IRS has released both new guidance and the new tax form -- Form 5405 -- which must be used to claim the homebuyer credit on your tax return.

The new guidance is aimed particularly at the newly eligible category of "long-time residents of the same main home" who want to benefit from the $6,500 credit for buying a new home. To be eligible, a homebuyer must have occupied the same home as his or her principal residence for five consecutive years during the eight years prior to the new home purchase. The homebuyer must intend to make the newly purchased home his or her principal residence (but is not required to sell the old home). The house being bought must have a purchase price of less that $800,000. The credit for purchases by long-term residents is actually for 10 percent -- up to $6,500 -- of the purchase price of the home.

Some of the new rules apply to first-time homebuyers and long-term resident homebuyers alike. The increased modified adjusted gross income limitation limiting eligibility for the credit was recently increased for all homebuyers. Now, the credit will begin to be phased-out as income increases above $125,000 for single taxpayers and $225,000 for joint taxpayers. It is fully phased-out income levels of $145,000 for singles and $245,000 for joint filers.

New documentation requirements apply to all, as well. A signed copy of the HUD-1 settlement sheet including the contract sale price and the date of closing must be included with your tax return. If a homebuyer claims the credit on a newly constructed home where a HUD-1 is not available, a certificate of occupancy may be sufficient. A retail sales contract is sufficient in the case of a mobile home purchase. A properly completed Form 5405 must be included with your tax return to claim the credit. Long-term resident homebuyers must also include written evidence to document their ownership and occupancy of their existing home. These new requirements for documentation stem from apparent widespread abuse of the credit earlier in the program.

Don't forget, the homebuyer tax credit is not a pure gift. It comes with some strings. Taxpayers who sell their new homes within 36 months after the purchase must reimburse IRS for the credit taken. The credit must also be paid back if the new home is converted from a principal residence to a rental or business property during the 36-month period following the purchase. Also, if the lender forecloses on the property during those 36 months, the credit must be repaid. Form 5405 is also used for the repayment of the credit.

So, if you want to take advantage of the homebuyer credit, now may be the best time to do it. You have until April 30, 2010, to enter into a binding contract, and until June 30, 2010, to close the deal. Happy house-hunting.

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Posted February 2, 2010.