Form 5405-FY"

Department of the Treasury
Internal Revenue Service

Credit for Purchase or Construction
of New Principal Residence

> Attach to Form 1040.

FY
1974-75

Name(s) as shown on Form 1040

security number

Note: Except in the case of self-construction, you must attach to your return a certification by the seller that the purchase price is
the lowest price at which the residence was ever offered for sale. (See Instruction E.)

1 Date new principal residence was acquired

2 If new principal residence is self-constructed, date construction began

3 Date you occupied new principal residence

Computation of Credit

Adjusted basis of new principal residence. Subtract line 5 from line 4. (See Instruction F.)

4 Cost of new principal residence. (See Instruction F.) .

5 Less: Any gain from the sale of an old principal residence which is not recog-
nized (From attached Form 2119 or statement.) .

6

7 Multiply the amount on line 6 by .05 .

8 Enter $2,000 ($1,000 if married filing separately.) CAUTION: If more than one

purchaser, an allocation must be made. See last paragraph of Instruction F .
9a Enter amount from Form 1040, line 16 .
b Total of all other credits on Form 1040, Part IV

¢ Subtract line 9b from line 9a .

10 ALLOWABLE CREDIT—Enter amount from line 7, 8, or 9c, whichever is smallest. Enter here and
between the entry spaces for lines 48 and 49 on your 1974 Form 1040, write “new principal resi-

dence credit” to the left of the entry and include the amount of the credit in the total for line 54

Instructions

(Section references are to the Internal
Revenue Code unless otherwise specified)

A. General rule.—You are allowed a credit
against your income tax in an amount of
5 percent of the adjusted basis of a new
principal residence purchased or con-
structed by you, if constructed, acquired,
and. occupied within specified periods.
The maximum credit is $2,000 ($1,000
if you are married and filing a separate
return), and <iie credit may not exceed
the amount of your tax liability (Form
1040, line 18 without regard to this
credit.) Also the credit is allowed with re-
spect to only one residence of a taxpayer.

To qualify for the credit you must meet
the following conditions:

(1) The residence must be your new
principal residence,

(2) The construction must have begun
before March 26, 1975,

The residence must be acquired
and occupied as your principal
residence after March 12, 1975
and before January 1, 1977,

Except in the case of self-construc-
tion, a binding contract for the
purchase of the residence must be
entered into before January 1,
1976, if settlement and occupancy
occur before January 1, 1977, and

Except in the case of self-construc-
tion, you must attach to your
return a certification by the seller
that the purchase price is the
lowest price at which the residence
was ever offered for sale.

B. New principal residence.—The prop-
erty purchased must be your new prin-
cipal residence, the original use of which

3)

(4)

(c)

commences with you. The term “principal
residence” refers to the place where you
lived most of the year and has the same
meaning as under section 1034. The term
“residence” includes a single family
structure, a residential unit in a condo-
minium or cooperative housing project,
your portion of a duplex or a row house,
and a mobile home. The residence must
be new. A renovated building does not
qualify as new for this purpose, regard-
less of the extent of the renovation. The
“original use” of the new principal resi-
dence by you means that such residence
has never been lived in prior to acquisi-
tion. For these purposes, a residence will
be treated as never having been lived in
prior to acquisition if the first occupancy
was by you pursuant to a lease arrange-
ment pending settlement under a binding
contract to purchase or pursuant to a
lease arrangement where a written option
to purchase was contained in the original
lease agreement.

C. Date construction commenced.—The
credit applies only to a new principal
residence the construction of which be-
gan before March 26, 1975. For this pur-
Pose, construction is considered to com-
mence when actual physical work of a
significant amount has occurred at the
building site. A significant amount of
construction requires more than drilling
to determine soil conditions, preparation
of an architect's sketches, securing of a
building permit, or grading of the land.
However, digging of the footings, excava-
tion of the building foundation, or similar
work constitutes a significant amount of
construction.

Construction of a mobile home or a
factory-built house is considered to com-
mence when construction of important
parts of the mobile home or factory-built
house commenced. Construction or as-

sembly of a minor portion of the com-
ponents of the mobile home or factory-
built house does not constitute com-
mencement of construction.

D. Acquisition and occupancy test.—The
credit. applies only to property you
acquired and occupied as your principal
residence after March 12, 1975, and be-
fore January 1, 1977. However, where
your residence was acquired by purchase,
rather than self-construction, it must also
have been acquired by you under a bind-
ing contract entered into before January
1, 1976. For these purposes, you have
“acquired” a residence when legal title to
it is conveyed to you at settlement, or you
have possession of it pursuant to'a bind-
ing contract under which you make pe-
riodic payments until you become en-
titled under the contract to demand con-
veyance of title. The credit may not be
claimed until both the acquisition and
occupancy tests have been satisfied. For
example, if your fiscal year ends on
November 30, and you meet the acquisi-
tion test set forth above after March 12,
1975, and you occupied the property as
your’ new principal residence before
December 1, 1975, the credit is allowed
on your 1974-75 Fiscal Year tax return.
Also, you may be entitled to the credit
with’ respect to a residence where you
entered into a purchase contract prior to
March 13, 1975, so long as settlement
ang occupancy occurred after March 12,

E. How to claim credit.—Attach this form
to your tax return on which the credit is
claimed. Attach Form 2119 or a state-
ment if you have any gain from the sale
of an old principal residence which is not
recognized. Except in the case of self-
construction, you must also attach a
certification ‘by the seller that the pur-
chase price is the lowest price at which
the residence was ever offered for sale.


Form 5405-FY (1974-75)

The following form for the certification
statement will be accepted:

| certify that the construction of the
residence at (specify address) was be-
gun before March 26, 1975, and that
this residence has never been offered
for sale in a listing, a written private
offer, or an offer by means of advertise-
ment at a lower purchase price than
(state price), the price at which | sold
the residence to (state name, present
address, and social security number of
purchaser) by contract dated (give
date).

(Date, seller’s signature and taxpayer

identification number.)

An offer to sell is limited to a listing,
a written private offer or an offer by
means of advertisement to sell a speci-
fied residence at a specified purchase
price.

In determining whether your new
residence was sold at the lowest purchase
price ever offered, appropriate adjust-
ment shall be made for differences in
financing terms and closing costs which
increase both the seller's actual net pro-
ceeds and your actual cost. Where the
sale to you includes property which was
not the subject of the prior offer or ex-
cludes property which was included in
the prior offer, the amount of the prior
offer shall be adjusted to reflect the fair
market value of such property, provided
that you had the option to require inclu-
sion or exclusion of such property in-
cluded in the sale. The fair market value
of any excluded property is to be deter-
mined at the time of the prior offer, while
all additions are to be valued at their fair
market value on the date of execution of
the contract of sale.

F. Adjusted basis.-—The cost of your new
principal residence includes all amounts
which are attributable to the acquisition
or construction of your new principal
residence, but only to the extent that
such amounts constitute capital ex-
penditures and are not allowable as de-
ductions. in computing taxable income.
To obtain your adjusted basis reduce the
cost of your residence by any gain from
the sale of an old principal residence
which is not recognized due to the
application of section 1033 or section
1034. For example, if you sold an old
principal residence for $40,000 which had
an adjusted basis of $25,000 and you
reinvested the proceeds by purchasing a
new principal residence for $50,000 (in-
cluding settlement costs which were
capital in nature) and this purchase satis-
fies the statutory criteria under section
1034 for nonrecognition of gain, then
the credit would apply with respect to
$35,000 of the cost of the new principal
residence. The credit does not in any way
affect your basis in your new principal
residence.

Where self-construction of your new
principal_ residence was begun before
March 13, 1975, only that portion of the
basis of the property allocable to con-
struction after March 12, 1975, and be-
fore January 1, 1977, shall be taken into
consideration in determining the amount
of the credit allowable. For example, if
prior to March 13, 1975, a taxpayer who
qualifies for the credit has constructed a
portion of a residence at a cost of
$20,000 and the total cost of the resi-
dence is $50,000, $30,000 will be subject
to the credit.

Where a new principal residence is
purchased by more than one person other
than you and your spouse, the amount of
the credit allowed will be allocated among
the purchasers in proportion to their re-
spective ownership interests in such
residence, with the limitation that the
sum of the credits allowed to all such
persons shall not exceed $2,000. For this
purpose, joint tenants with’ right of sur-
vivorship are treated as equal owners

G. Purchase.—To qualify, the acquired
property cannot be acquired by gift (in
whole or in part), by bequest, devise, or
inheritance or by purchase from a person
whose relationship would result in_dis-
allowance of a loss under section 267 or
707(b) (relating to transactions between
related taxpayers). For this purpose, the
family of a taxpayer, includes only his
spouse, ancestors, and lineal descend-
ents.

H. Recapture of credit—The amount al-
lowed as a credit on a purchase is recap-
tured in the event you sell or otherwise
dispose of your residence within 36
months after the date on which you
acquired the residence (or, in the case of
self-construction, on the day on which
you first occupied the residence) as your
principal residence. There are exceptions
for reinvestment in a_new principal resi-
dence and for certain involuntary disposi-
tions.

If the cost of purchasing a new resi-
dence is at least equal to the adjusted
sales price of the old residence, no por-
tion of the credit allowed is recaptured.
However, if the cost of purchasing a new
residence is less than the adjusted sales
price of the old residence, the tax for the
year following the year of sale is in-
creased by an amount which is the fol-
lowing fractional portion of the credit
allowed:

Adjusted sales price of the old residence
reduced (but not below zero) by cost of pur-
chasing the new resit e

Adjusted sales pt he old residence.

For example, George and Sue Williams
(fiscal year taxpayers with a fiscal year

Page 2

ending on November 30) purchase a
newly constructed residence, which is
available for occupancy on March 25,
1975, The closing date is September 8,
1975, and the Williams family moves in
on October 1, 1975. The purchase price
of the residence is $50,000. On their
1974-75 Fiscal Year joint’ income tax re-
turn, the Williamses may take a credit of
$2,000 (5% of the purchase price
($2,500) but not more than the maximum
credit limitation).

In 1976, George Williams’ employer
transfers him to another city. On Oc
tober 20, 1976, the Williams family sells
their residence at an adjusted sales price
of $65,000. On November 10, 1976, they
purchase another new residence for
$60,000.

The effective fraction in determining
the amount of credit recapture is
5,000; 999 OF M43. Therefore, 4x of $2,000
or $153.85 must be added to their tax
liability for the 1976-77 Fiscal Year on
account of the three-year recapture rule.

The recapture does not apply to the
following types of dispositions:

(A) A disposition of a residence made
on account of the death of any individual
having a legal or equitable interest in a
residence,

(B) Disposition on account of com-
plete or substantial destruction of a resi-
dence by fire, storm, or other casualty
(described in section 165(c)(3)),

(C) Compulsory and involuntary con-
version of the residence (within meaning
of section 1033(a)), or

(D) A disposition pursuant to a settle-
ment in a divorce or legal separation pro-
ceeding where the other spcuse retains
the residence as a principal residence.

I. Penalties.—Civil penalties and crimi-
nal fines and imprisonment could result
from false certification by a seller. If it is
found that the price for which the resi-
dence was sold is not in fact the lowest
price for which the residence was ever
offered for sale, then the statute provides .
that a seller who certified that it was, is
liable to the purchaser for damages in an
amount equal to three times the excess
over the lowest purchase price plus rea-
sonable attorney's fees. No income tax
deduction is allowed to the seller for two-
thirds of any damages paid or incurred
pursuant to a judgment entered against
the seller in a suit brought by a purchaser
on this issue. An individual who falsely
certifies is liable for criminal penalties
such as those under section 1001 of Title
18 of the United States Code.

For more information get Publication
591, Tax Credit for the New Home Buyer,
available at your Internal Revenue Service
office.

#U. 8. GOVERNMENT PRINTING OFFICE: 1975 ~ 0~ 641-197 REGION NO. 4