First Time Home Buyer Tax Credit – IRS clarification

Forbes magazine says the Internal Revenue Service (IRS) has clarified that the new $8,000 tax credit for first-time homebuyers can’t be claimed before the actual purchase.

Seems some buyers were claiming the credit first and then using the $8,000 check from the government as a down payment!

 A number of tax practitioners and real estate professionals argued taxpayers can claim IRA deductions prior to the actual contribution, as long as the contribution is made by April 15 of the following year. So why can’t homebuyers use the same logic?

 “But the IRS’ position, expressed in a series of questions and answers it issued earlier this month, shouldn’t have come as a surprise,” said the April 21 article by Mark A. Luscombe.

 “The language of the law clearly required a purchase to have taken place before a taxpayer claimed the credit, and IRS form 5405, used to claim the credit, has a line requiring a taxpayer to enter the date of the home purchase.”

 Luscombe points out the money is sent fairly quickly after the purchase, with homebuying taxpayers who already filed 2008 returns eligible to file an amended return. The refundable credit means buyers can get the entire $8,000 even if their federal income tax paid was less than that.

 IRS to look closely at claims

The other confusing issue is the definition of “first-time home buyer.” For purposes of this specific tax credit, it includes homebuyers who have not owned a home within the past three years.

IRS estimates are that 7 percent of those who had claimed the credit so far might not be eligible because “they may have had ownership in a personal residence within the last three years.”

The article said it was unclear what penalties may be assessed to homebuyers who had claimed the credit prior to the qualifying home purchase. But it said tax practitioners could be looking at preparer penalties if they assisted in claiming such a credit.

A preliminary report by the Treasury Inspector General for Tax Administration looked at 56.9 million tax returns received through March 6. It estimated some 1.4 million taxpayers will claim the federal first-time homebuyer tax credit on their 2008 returns, meaning the program is likely by the Nov. 30, 2009, deadline to meet or exceed the 2 million target set by Congress.

 For the IRS guidelines on the new credit, including a link to Form 5405, click here.

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