When the first-time home buyer credit was originally introduced, claiming the refund was simple. Taxpayers reported they’d purchased a house, how much it cost, and then claimed the refund.
However, some people took a few liberties with the process along the way.
The Internal Revenue Service as well as some watchdog groups have since reported that millions in credits were improperly paid out to people submitting multiple claims, claims for houses that were never purchased and for houses purchased before the program started. Offenders included prison inmates and even some IRS employees. As one might expect, the government took a dim view of the fraudulent filing.
When the program was revised in November 2009, Congress ordered the IRS to tighten the rules to prevent such abuse. If you’ve purchased a house and are eligible to claim either the first-time buyer credit or the repeat buyer credit, the reporting requirements are now more stringent. However, as long as you have a couple of documents handy, obtaining the credit shouldn’t be too difficult.
Eligible first-time and repeat buyers will need to take these steps to obtain the credit:
- Complete and file the revised Form 5405 – First-Time Homebuyer Credit, with your annual tax return. This is something your CPA can assist you with.
- Provide your CPA with Form HUD-1 – your home purchase Settlement Statement. This will be among your closing documents.
- Your settlement statement(s) will need to show:
- All parties' names and signatures
- Property address
- Sales price
- Date of purchase
Normally, all this information is included in a properly executed Form HUD-1, Settlement Statement.
The challenge with using this statement is that home-closing and settlement customs vary from state to state. Sometimes the HUD-1 doesn’t include both the seller’s and buyer’s signatures. In Washington for example, buyers and sellers generally don’t sit down together at closing, so your HUD-1 may not include both sets of signatures.
The IRS addressed this problem by loosening its requirement and issued a statement announcing that the agency will accept a settlement statement without signatures if it is “completed and valid according to local law.” The agency also announced that it encourages buyers to sign the settlement statement prior to attaching it to the tax return, even if the seller has not signed the settlement and it isn’t required by state law.
In addition to the documents listed above, repeat home buyers, buyers of new construction and mobile home buyers will need to provide additional documentation.
For repeat home buyers:
- Provide documentation showing that, before the latest purchase, you lived in your former property for a consecutive five-year period out of the past eight years.
- You can substantiate this by providing Form 1098, mortgage interest statements (or substitute statements if applicable). These statements document the interest you’ve paid on a yearly basis. You can also provide property tax records or homeowner’s insurance records, as an alternative to Form 1098.
- Regardless, records should be for five consecutive years of the eight-year period ending on the purchase date of the new home.
For a newly constructed home (where a settlement statement is not available):
- Attach a copy of the certificate of occupancy showing your name, the property address and the date of the certificate.
For mobile home purchasers:
- Attach a copy of the executed retail sales contract showing all parties' names and signatures, the property address, the purchase price and the date of purchase.
There’s a significant pile of paperwork that accompanies buying a home. With the hustle and bustle of moving, that paperwork can wind up out of sight and out of mind – possibly buried in your new basement or attic. So, while the topic is on your mind, make copies of the documents necessary for your purchase and keep those records somewhere they’ll be easy to find when you’re ready to send your documents to your CPA.
If you have questions about which documents you need to provide your CPA and the IRS, feel free to contact us…..and congrats on your purchase!
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