Can I buy out my first home during a divorce with IRA funds without penalty?

[sibojan9]

My wife and I bought our first-time house one year ago. Now, we are entering into divorce and have decided to split the house value equally. I would like to stay in this house by buying out my wife's share. To get the fund to pay my wife, can I use the IRA fund up to $10k without penalty? My understanding is I am still the first-time buyer but now aim to complete the full transaction to get the entire first-time house this time. Thanks.- SJ

[DoninGA]

You can use an IRA withdrawal of up to $10,000 without being liable for the 10% early distribution penalty to acquire, build or rebuild a first home. 

Since you have previously acquired the home any withdrawal from an IRA will be subject to the 10% early distribution penalty if you are under the age of 59 1/2.

[Critter-3]

An option would be to have the divorce instrument put in a QDRO  to compell the  IRA custodian to distrubtion a portion of your IRA to the EX at no tax cost to you.  Then the EX can either roll all of it into their own IRA tax free  or  take the distribution and pay the taxes on it plus the penalty if they are under 59.5 years old. 

https://www.irs.gov/instructions/i1099r#en_US_2022_publink1000291951

https://www.investopedia.com/personal-finance/whats-qdro/

[dmertz]

It seems that you do not qualify as a first-time homebuyer because you will have had an ownership interest in a principal residence during the two years immediately prior the the buyout.

QDROs do not apply to IRAs.  The settlement agreement would instead call for a transfer incident to divorce of a portion of the IRA, which is neither a distribution nor a rollover.  However, determining an equitable division of the IRA in exchange for you keeping all of the house would be complicated by the fact that the IRA is deferred income such that your ex-spouse would owe taxes and possible early-distribution penalty on a distribution from the IRA.  If assets were generally being split equally, the transfer incident to divorce would be 50% of the IRA and no part of that would be in exchange for the ex-spouse's half of the house.

[Opus 17]

No, you are not a "first time" homebuyer under the meaning of the law, because you own (including owning a shared interest) the home you have used as your main home, at some time in the past 2 years. 

If you were a qualified first time home buyer last year, you could have withdrawn up to $10,000 to buy the home without paying the 10% penalty, but those funds had to be withdrawn up to 120 days before the closing date, after the closing date it is too late to withdraw funds to apply them to last year's purchase and you don't qualify this year.