I think so. The $5000 is treated as a price reduction for tax purposes, so if your closing costs (downpayment plus escrow funding plus other fees) are more than $10,000, you can use the penalty-free distribution. Or another way of looking at it would be, you use $10,000 of the IRA to close, and use the $5000 from the seller for the repairs.
@Critter I saw you voted this up, do you agree on the followup?
