IRS finally releases new form for first-time buyer and repeat-buyer tax credits

If you've been holding back on getting involved with the new $6,500 federal tax credit for repeat home purchases or $8,000 credit for first-time buyers, there's no more excuse for inaction. You now have all the official IRS guidance you'll need to buy a house, qualify for the credit and pocket the money. (To download the form, click here).

That's because the Internal Revenue Service finally published the rules for the repeat-purchase credit, with key details for taxpayers that had been missing since President Obama signed the legislation creating the program Nov. 6.

On Jan. 15, the IRS posted its revised Form 5405, six weeks after warning taxpayers not to file claims for the credits without using the revised form and new instructions.

The $6,500 credit -- inelegantly described by the IRS as credit for the "long-time resident of the same main home" -- supplements the popular $8,000 credit for first-time purchasers. Owners of existing homes -- specifically, taxpayers who have occupied the same property as a principal residence for five consecutive years during the previous eight years -- may now be able to claim a tax credit on a purchase of another house they intend to use as a principal residence.

The credit is for up to 10 percent of the price of the replacement home, capped at $6,500. The purchase contract must be dated from Nov. 7, 2009, to April 30, and the closing must occur no later than June 30. Members of the armed forces and federal diplomatic and intelligence personnel stationed overseas get an extra year to claim the credit.

The maximum purchase price on houses eligible for the credit is $800,000. Purchasers are not required to sell their previous home, but they must be able to demonstrate that the replacement house is or will be their principal residence.

The new IRS guidance answers key questions that had arisen from the vague language in the legislation. For example, the IRS describes what documentation home buyers must submit with their $6,500 credit claim. On 2009 and 2010 tax returns, buyers should attach the following:

-- A copy of the signed HUD-1 settlement sheet, including the contract sale price and the date of closing. This is to document that the timing of the transaction meets the program's requirements.

-- Evidence of long-term ownership and occupancy of the previous house to meet the five-consecutive-years requirement. This can be property tax records, homeowner's insurance records or IRS Form 1098 mortgage interest statements for the five-year period.

-- For buyers claiming a credit on a newly constructed home, for which a HUD-1 settlement sheet is not available, the IRS will accept a copy of the certificate of occupancy showing the purchasers' names, the property address and the date.

-- For buyers of mobile homes who are not able to get a settlement statement, the IRS will accept a copy of the executed retail sales contract showing the property's address, purchase price and date of purchase.

Congress mandated all this extra documentation after audits uncovered widespread abuses by applicants for the $8,000 credit. Among these were fictitious home purchases in which taxpayers or tax preparers sought -- or obtained -- credits on properties that never were sold or bought. This time around, the IRS says it will rigorously investigate all claims filed, starting with a review of the documentation submitted.

The new IRS guidance also spells out the revised income limits for home buyers claiming credits: Your modified adjusted gross income must be $125,000 or less if you are single, $225,000 or less if you are married and filing jointly. Above these limits, the allowable credit amount begins to phase down in increments and is eliminated once incomes hit $145,000 for singles and $245,000 for married joint filers.

There are pitfalls as well: An advisory posted by the IRS this month spelled out situations in which recipients of tax credits may have to repay them to the government. These include taxpayers who sell their houses within 36 months after purchase. Recipients must also repay the credit if they convert their principal residence to a rental or business property, or if their lender forecloses on the house.

With all the rules now available, here's the action message to potential tax-credit seekers: Speed up your search for the house you want to buy. Get moving. There are only 14 weeks to sign a contract and just five months to go to closing.