IRS clarifies which documents home buyers need for tax credits
WASHINGTON — Despite back-to-back blizzards that shut federal offices for days, the IRS issued new guidance Friday on the two tax credit programs that are powering the country's real estate markets: the $6,500 credit for repeat buyers and the $8,000 first-time buyer credit.
The new policy clarifies the documents taxpayers need to submit to obtain either credit. When Congress revised the credit programs in November, it ordered the IRS to tighten its rules and monitoring to curtail widespread frauds that had emerged earlier in 2009.
Here's what the agency wants from anyone seeking a credit:
• A complete IRS Form 5405 (available at irs.gov) on which taxpayers provide basic information supporting their claim of eligibility, including income and home purchase date.
• A copy of the "settlement statement" that proves the sale and purchase transaction actually took place. In instructions to taxpayers issued last month, the IRS said the settlement statement should show "all parties' names and signatures, property address, sales price and date of purchase. Normally this is the properly executed Form HUD-1, Settlement Statement."
The problem, however, is that home closing and settlement customs vary from state to state, and sometimes the HUD-1 does not contain both the seller's and the buyer's signatures. For example, in escrow states, where settlements are not sit-down affairs bringing together sellers and buyers, both sets of signatures may not appear on the HUD-1 received by the buyer.
In California, buyers sign an estimated closing statement or an estimated HUD-1 "at the time they sign their loan documents," according to Donna Grosso, president of the California Escrow Association. Sellers have their "estimated closing submitted to them for their review and signature during or near the same time period as the buyer. We prepare the final closing statement or the final HUD-1 on the closing date" — which is the date of recordation.
As a result, said Grosso, "we do not have the buyers or sellers available to sign the final closing statement." This creates an apparent obstacle to meeting the IRS' instructions and makes it more likely that applicants will have their claims rejected or delayed for special review.
The agency tried to address that issue Feb. 12 by loosening its requirements. "In areas where signatures are not required on the settlement document, the IRS has clarified that it will accept a settlement statement if it is completed and valid according to local law," said the agency. "The IRS encourages those buyers to sign the settlement statement prior to attaching it to the tax return. In situations where the signature of the seller is not on the settlement document, the IRS advises the buyer to still sign the document."
Despite the fact that Form 5405 continues to require all parties' signatures on the HUD-1 or settlement document, the agency is now essentially saying: Don't worry about it — as long as your settlement statement conforms to prevailing local practices, we'll accept it.
This is potentially important for large numbers of repeat and first-time buyers who are planning to file for the credit with this year's tax returns and want to be sure they get through the IRS's tougher standards. Nationwide, according to estimates by the National Association of Realtors, 1.5 million repeat purchasers and 900,000 first-timers are expected to apply for credits this year.
• For repeat purchasers, the agency also wants documentation that, before their latest purchase, they had lived in their former property for a consecutive five years out of the past eight years. This may include property tax records, hazard insurance records or copies of annual mortgage interest statements filed with their federal taxes.
One caveat for all filers: Because of the increased documentation and monitoring, IRS processing will take four to eight weeks, so don't expect your $6,500 or $8,000 check overnight.
Ken Harney can be reached at [email protected]