For purposes of this paragraph, the term "qualified acquisition costs" means the costs of acquiring, constructing, or reconstructing a residence. Such term includes any usual or reasonable settlement, financing, or other closing costs.
Tell me more about “Qualified first-time homebuyer distributions up to $10,000”.
Can a buyer, as a first-time home buyer, make a withdrawal (take a disbursement) from his traditional IRA without tax penalty in order to purchase (help with the down payment) on a new home?
Define what a “qualified first-time homebuyer” is:
I assume that this is when the buyer has not owned a home in the last three years prior to closing on a new home purchase.
Yes – Qualified first-time home buyers are eligible for additional 10% penalty tax exclusion for up to $10,000 on an IRA distributions, but not 401(k) distributions.
However, you still will have to pay the "regular" income tax on the distribution itself, excluding your nondeductible contributions. So be sure to answer follow up questions about your IRA distribution. TurboTax will ask if you have any nondeductible contributions in your IRA (called basis). Please be sure to enter your basis amount, only the difference between your distribution and your basis will be taxed.
As to the definition of the "qualified first-time homebuyer": you may qualify for the exception if you had no interest in a main home and met the 2-year rule:
Per IRS: (page 26, IRS Pub 590B): "Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement."
Yes – Qualified first-time home buyers are eligible for additional 10% penalty tax exclusion for up to $10,000 on an IRA distributions, but not 401(k) distributions.
However, you still will have to pay the "regular" income tax on the distribution itself, excluding your nondeductible contributions. So be sure to answer follow up questions about your IRA distribution. TurboTax will ask if you have any nondeductible contributions in your IRA (called basis). Please be sure to enter your basis amount, only the difference between your distribution and your basis will be taxed.
As to the definition of the "qualified first-time homebuyer": you may qualify for the exception if you had no interest in a main home and met the 2-year rule:
Per IRS: (page 26, IRS Pub 590B): "Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement."
When making this distribution, can taxes be withheld for Federal and State payments in excess of the $10,000 penalty free amount? That is, can I receive the full $10,000, but withhold $2,500 for Federal income taxes (as an example) and not be penalized on the $2,500? After all, I'm not distributing those funds.
@johnkelly1023 No. If you withdraw $10,000 and have $2500 withheld, you would receive a check for $7500. If you withdraw $12,500, you would receive a check for $10,000, BUT the amount of the withdrawal is OVER $10,000, so that 'extra' $2500 would be subject to a penalty.
Does the entire amount withdrawn have to go to the downpayment or can part of it be used to do things like paint and buy new appliances on the purchased home?
I'm am also trying to determine if deposits or closing costs are the only qualified expenses. We used IRA money to build a retaining call and install a fence and I am trying to determine if those expenses are also valid homebuyer costs
The exception to the penalty is for amounts used to "acquire" the first home. Jbthomp07, the expenses you mentions sound like improvements, not acquisition costs. If you could live in the home without these improvements, I don't think that they could be considered to be acquisition costs.
Section 72(t)(8)(C):
(C) Qualified acquisition costs
For purposes of this paragraph, the term "qualified acquisition costs" means the costs of acquiring, constructing, or reconstructing a residence. Such term includes any usual or reasonable settlement, financing, or other closing costs.
How do I document and/or submit these qualified acquisition costs to TurboTax or the IRS? I suppose I should keep various relevant paperwork, but I want to make sure I do it correctly the first time. I've definitely been screwed over in the past by assuming it'll all work out and then getting a nasty surprise next April!
Keep a copy of your settlement statement with your tax return in case the IRS questions the distribution in the future.
To indicate that the withdrawal from your IRA is for a first-time home purchase, and not subject to the 10% penalty, please follow these steps:
Can I withdraw from Rollover IRA for the first time home purchase?
@phani_k27 wrote:
Can I withdraw from Rollover IRA for the first time home purchase?
Once you have money in an IRA, the first $10,000 you withdraw for a first time home purchase is exempt from the 10% penalty, although you still pay regular income tax. It doesn't matter if the money was rolled over from a different kind of account.