Of the two versions it makes sense that the one that is combining two words into a contraction takes the apostrophe. Makes sense to me anyway, it's how I remember.
Homonyms are where two words are spelled the same, yet carry different meanings. Both the possessive and contractive forms of "it's" are now homonyms. I have spoken.
Agreed. The possessive and contractions should be homonyms, both carrying the apostrophe. "Its" would be the nonsensical plural form of an inherently singular word: "This "it", that "it", and those "its" over there...".
The good news is that all words are made up. We can, indeed, use the same "it's" for both the possessive form of "it" and the contraction of "it is".