Taxes - 2 Part question

[Anthony6109]

I am 62 and retired but not drawing social security yet.

Is there a tax credit or deduction when selling and buying a house?  I am downsizing from my current house to a smaller less expensive house.

What are the tax ramifications if I buy a new house with money from my IRA while still living in my current house.  The current house will be sold after the new house is ready.

[LorenL1]

Hi Anthony,

Selling your home:  If you owned and lived in the home for a total of two out of the five years before the sale, then up to $250,000 of profit is tax-free (or up to $500,000 if you are married and file a joint return).

https://turbotax.intuit.com/tax-tips/home-ownership/tax-aspects-of-home-ownership-selling-a-home/L6t... 

Buying a home -  Unfortunately, most of the paid expenses when buying a home are not deductible in the year of purchase however, you may be able to deduct your prepaid mortgage interest (points), your property taxes  and interest paid on your home loan.  https://turbotax.intuit.com/tax-tips/home-ownership/home-ownership-tax-deductions/L7nXpU8Xz 

The tax ramifications for buying the new house with money from your IRA:  Unfortunately, you will not qualify for an IRA exemption since you are not a first-time homebuyer.  Generally, distributions from a traditional IRA are taxable and qualified distributions from a ROTH IRA are tax free.  Since you are 62, you would not incur an early withdrawal penalty.

[Jackstar221]

Hi,

Here is an article regarding your questions:

https://blog.turbotax.intuit.com/income-and-investments/what-is-the-ira-withdrawal-age-53977/ 

Once you’ve hit the age of 59.5, you may start to take distributions in your Traditional IRA without the 10% penalty, but you will still be taxed, as these funds went into your account with pre-tax dollars.

Roth IRAs work a little differently than traditional IRAs, as they provide a little more leeway for the account owner. Unlike the traditional IRA, money contributed to your Roth IRA is post-tax, meaning that it is taxed before it goes into the account. 

You can take a Roth IRA distribution on your contributions at any time without penalty or taxes. If you wish to withdraw your Roth IRA earnings, however, there are certain circumstances where there are no taxes or penalties:

• You must be age 59.5 or older, and
• Your Roth IRA account must be active for five years or more

Here is an article regarding avoiding tax on sale of a home:

https://turbotax.intuit.com/tax-tips/home-ownership/tax-aspects-of-home-ownership-selling-a-home/L6t... 

• If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free.
• If you are married and file a joint return, the tax-free amount doubles to $500,000.

The law lets you "exclude" this profit from your taxable income. (If you sold for a loss, though, you can't take a deduction for that loss.)

• You can use this exclusion every time you sell a primary residence, as long as you owned and lived in it for two of the five years leading up to the sale, and haven't claimed the exclusion on another home in the last two years.
• If your profit exceeds the $250,000 or $500,000 limit, the excess is reported as a capital gain on Schedule D.

In addition, if you have enough deductions to itemize on schedule A, you can use mortgage interest and real estate taxes paid on your home to be used as deductions to reduce your adjusted gross income.

Thank you,

John

CPA

[MartyG]

Hi Anthony6109,

No credit that I know of when selling or buying a house.  As for deductions, you would be able to deduct interest on the loan and property taxes (up to $10k total tax deduction) as an itemized deduction.  If the standard deduction is greater (like it is for most taxpayers) it is possible to get no tax benefits from purchasing a house (this of course ignores any economic or lifestyle benefits).

At 62, making a withdrawal from an IRA is penalty free.  However, if the IRA is a traditional IRA (not a Roth), then you will pay ordinary income tax on the withdrawal to the extent the IRA had deductible contributions.  If your IRA is a Roth IRA, you would be able to tax a distribution tax free to use in buying your house.

As for selling your current house after buying your new house, that should pose no tax problems.  You are entitled to a $250,000 gain exemption ($500,000 if married) for any gain on the sale of a principal residence, so long as you lived in it for 2 of the last 5 years.

I hope this helps!

Marty

[VolvoGirl]

Be careful when withdrawing from a IRA.  In addition to the answers above, if the distribution is taxable it will add to your other income and may push you into a higher tax bracket.