Documenting the First-Time Homebuyer Credit

Posted on April 6, 2010. Filed under: Tax Tips | Tags: , , , |

To help stimulate the economy and the market for home sales, in 2008 Congress enacted a refundable tax credit for first-time homebuyers. IRC §36, First-time Homebuyer Credit provided eligible individuals with a maximum credit of $7,500 for a principal residence purchased after April 8, 2008 and before July 1, 2009. The buyer could not have owned a principal residence during the three-year period prior to the purchase date of the credit-qualifying home and had to be within a specified adjusted gross income (AGI) limit. This credit, as originally formulated, was really an interest-free loan because it had to be paid back at a rate of $500 per year starting in the second year following the year the home was purchased. Thus, a $7,500 credit claimed for a home purchased in 2008 is to be paid back through reporting on Form 1040 at $500 per year for 2010 through 2024. If the home is disposed of within 15 years of purchase or ceases to be a principal residence, repayment is accelerated.

With the American Recovery and Reinvestment Act (ARRA) of 2009 (P.L. 111-5, February 17, 2009), the credit was extended for home purchases made by November 30, 2009. The 2009 Act also increased the credit to a maximum of $8,000 and removed the repayment requirement for homes purchased in 2009, provided they are held at least 36 months.

Finally, in November 2009, the Worker, Homeownership and Business Assistance Act of 2009 (P.L. 111-92 (PDF), November 6, 2009), extended the credit to homes purchased before May 1, 2010. If a binding contract is entered into on or before April 30, 2010, the sale must close before July 1, 2010 to qualify for the credit. For homes purchased after November 6, 2009, this legislation adds a smaller credit (up to $6,500) for certain “long-term residents of [the] same principal residence,” increases the AGI cut-off for the credit, and denies a credit for homes that cost more than $800,000. This law change also addresses some concerns about misapplication of the credit. To claim the credit for a home purchased after November 6, 2009, the buyer must be at least 18-years-old and not a dependent. The November 2009 legislation also added a new documentation requirement.

The balance of this article focuses on the changes made in late 2009 regarding documentation.

Credit Abuse

One of the abuses discovered with respect to the first-time homebuyer credit was that some individuals claiming the credit had not purchased a home. (For information on other abuses, see Interesting Reports of 2009.) As of July 2009, the IRS reported it was actively pursuing 24 criminal investigations of possible fraud tied to the credit (“IRS Warns Taxpayers to Beware of First-Time Homebuyer Credit Fraud, IR-2009-69.) In February 2010, the U.S. Department of Justice sought judicial relief “to stop two Miami-based tax return preparers from improperly claiming the First-Time Home Buyer Credit” (February 23, 2010 press release). As noted in the Miami Herald, an IRS review of 60 returns prepared by these two preparers indicated only one taxpayer qualified for the credit (Nirvi Shah, “Two Miami-Dade Tax Preparers Accused of Home Buyer Credit Fraud,” February 23, 2010).

Congress responded to the reports of the Government Accountability Office (GAO) and Treasury Inspector General for Tax Administration (TIGTA) released in October 2009 by adding new restrictions when it extended the credit in November 2009 (see “Interesting Reports of 2009” for further information on the reports). A new documentation requirement added in November 2009 (explained next) applies beyond the extended credit to any first-time homebuyer credit claimed in 2009 or 2010.

Documentation Requirement

The Worker, Homeownership and Business Assistance Act of 2009 (P.L. 111-92, November 16, 2009), added IRC §36(d)(4). Under this provision, no credit is allowed if “the taxpayer fails to attach to the return of tax for such taxable year a properly executed copy of the settlement statement used to complete such purchase.” The Form 5405 instructions further clarify that the documentation:

Is typically a Form HUD-1, Settlement Statement, “properly executed.”

Should show the names and signatures of the parties, the address of the home, the sales price and the purchase date.

An IRS addendum to the Form 5405 (PDF) instructions notes that settlement statements can vary from jurisdiction to jurisdiction and might not be signed. Per the IRS, 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.” If local law does not require the parties to sign the statement, “the IRS encourages the buyer to sign the settlement statement prior to attaching it to the tax return even in cases in which the settlement form does not include a signature line.”

If the buyer does not have an executed settlement statement because a newly constructed home was purchased, the buyer should attach a copy of the “certificate of occupancy” that notes the buyer’s name, address and certificate date. If the principal residence is a mobile home with no settlement statement, the buyer should include the executed sales contract that indicates the names of the parties, the property address, the sales price and date. (IRS, First-Time Homebuyer Credit Web site.)

Finally, the IRS reminds taxpayers claiming the credit for a home purchased in 2009 that a paper return must be filed (rather than e-filing) because of the requirement to attach the settlement statement. (IRS, First-Time Homebuyer Credit Web site.)

Additional Documentation

While the statute does not require it, the IRS instructions encourage anyone claiming the credit under the special rule for “long-time residents” of the same principal residence to include documentation beyond the required settlement statement. The purpose is to prove that the taxpayer owned a principal residence for a five-consecutive-year period during the eight years ending on the date the new principal residence is purchased (IRC §36(c)(6)). The five years of documentation recommended by the IRS to be attached to the return includes:

“Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,

Property tax records or

Homeowner’s insurance records.” (IRS, First-Time Homebuyer Credit Web site.)


Reports of fraudulent claims of the first-time homebuyer credit led to additional compliance measures. Even with the required attachment of a settlement statement to show that an individual did indeed purchase a home, the IRS must still find ways to verify that the documentation is legitimate, the home is a principal residence, and that the individual meets the definition of a first-time homebuyer.

To avoid delays in return processing or denial of the credit, practitioners will want to be sure to include the required settlement statement signed by the buyer, and for individuals claiming the credit under the “long-time resident” special rule, attach the recommended documentation to prove that the five-year consecutive year ownership requirement was met.

(March 11, 2010, by Annette Nellen, CPA, Esq.)

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5 Responses to “Documenting the First-Time Homebuyer Credit”

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Meanwhile I’m the exact opposite to most people at commenting and will comment if I have the tiniest little thing to say, probably cos I started commenting with TwentyMajor’s blog that almost instantly goes off topic.

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