What does the Homebuyer Tax Credit Extension mean for you?
On July 2, 2010, President Obama signed into law H.R. 5623, the “Homebuyer Assistance Improvement Act of 2010″ (the Act), which provides a first-time homebuyer tax credit for taxpayers who could not meet a key June 30, 2010 closing date. The House of Representatives passed the Act, on June 29, 2010, and the Senate unanimously passed it on June 30. On the same day that it was signed into law, the IRS issued a reminder that special filing and documentation requirements apply when claiming the homebuyer credit, including the information that must be provided by those taxpayers eligible to take advantage of the new law relief.
Applies Only to First-time Home Buyers under a Binding Contract before May 1, 2010
The first-time homebuyer credit is equal to the lesser of $8,000 ($4,000 for a married individual filing separately) or 10% of the principal residence’s purchase price. However, for purchases after November 6, 2009, any taxpayer 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 before the taxpayer buys the subsequent principal residence (long-term resident). The maximum allowable homebuyer credit for such taxpayers, who are treated as first time homebuyers for purposes of the first-time homebuyer credit, is the lesser of $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 income phase-out range for the first-time homebuyer credit is between $125,000 and $145,000, and for those filing a joint return, it’s between $225,000 and $245,000.
- The first-time homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000; and The Act applies several anti-abuse provisions, including: dependents cannot claim the first-time homebuyer credit; a purchaser must be at least 18 years of age on the date of purchase; and the definition of a qualifying purchase for first-time homebuyer credit 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.
The first-time homebuyer credit could only be applied to the purchase of a principal residence closed May 1, 2010 , under the initial Act, but was later extended to include the purchase of a principal residence, under a binding contract before May 1, 2010 , if the purchase was closed before July 1, 2010.
The New Extension
The July 2010 extension provides that if a written binding contract to purchase a principal residence by a first-time homebuyer must have been entered into before May 1, 2010, and scheduled to close before July 1, 2010, the credit may be claimed if the purchase is closed before October 1, 2010. Thus, this extension allows homebuyers who signed a contract no later than 11:59PM, on April 30th, 2010, with an initial closing date set before July 1, 2010, to complete their closing by the end of September and still qualify for the credit.
- Anyone claiming the homebuyer credit, who entered into a purchase contract on or before April 30, 2010, but closed after that date, should attach to their return, a copy of the all pages from the signed contract showing all parties’ names and signatures required by law, the property address, the purchase price, and the date of the contract.
- The homebuyer must complete an IRS Form 5405, and with their return, all eligible homebuyers must also include one of the following documents: A copy of the settlement statement showing all parties’ names and signatures, property address, sales price, and date of purchase (Normally this will be a properly executed HUD-1, Settlement Statement). While the Form 5405 instructions indicate that a properly executed settlement statement should show the signatures of all parties, the IRS recognizes that the elements of the settlement document may vary from jurisdiction to jurisdiction and may not reflect the signatures of the buyer and seller. The settlement statement that must be attached to the return is considered to be properly executed if it is complete and valid according to local law. In locations where signatures are not required, the IRS encourages the buyer to sign the settlement statement prior to attaching it to the tax return even in cases where the settlement form does not include a signature line.
- 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.
- A taxpayer who entered into a binding contract before May 1, 2010, that closes by July 1, 2010 (i.e. closed but haven’t filed before the new Act was signed July , 2010), must also attach pages from the signed contract showing all parties names and signatures, the property address, the purchase price, and the date of the contract.
- A taxpayer claiming the credit as a “long-term resident” of the same main home must attach copies of one of the following: Form 1098, Mortgage Interest Statement (or substitute statement); Property tax records; or Homeowner’s insurance records (For each of 5 consecutive years out of the last 8 years prior to purchase date of the new home).
Options for claiming the credit:
There are three options for claiming the credit on a qualifying 2010 purchase:
- If a 2009 return has not yet been filed, a taxpayer can claim the credit on an IRS Form 1040 for the 2009 tax year. Although it can no longer be filed electronically for 2009, taxpayers can still use IRS Free File to prepare their return. The returns must be printed out and sent to the IRS, along with the required documentation.
- If a 2009 return has already been filed, a taxpayer can claim the credit on an amended return using IRS Form 1040X.
- Whether or not a 2009 return has been filed, a taxpayer can wait and claim the credit on a 2010 IRS Form 1040.
The three-month extension of the closing date is intended to provide tax relief for those who could not close on time because of lender delays, and federal programs that have slowed down the home loan process, at no fault of their own. You should consult with your accountant to determine when and how you should file to best meet your financial needs. If you have questions about the interpretation of this act, or whether it applies to your particular situation you should contact an attorney.