Yes doesn't matter what you did with the money. And if you are under 59 1/2 there is a 10% Early withdrawal penalty on it. You will get a 1099R for the distribution.
The simple answer to your question is yes, the distribution from the 401K is a taxable event and will be reported to you on Form 1099-R and subject to your normal income tax rates. If you are under age 59 1/2, it will also be subject to a 10% penalty for early withdrawal. As you did not mention who was occupying the townhouse, any mortgage interest and property taxes may be reported as an itemized deduction on Schedule A of your 1040 or if a rental, the income and expenses would be reported on Schedule E with the basis of the townhouse being subject to depreciation.
If you are under 59 1/2 you will pay an early withdrawal penalty of 10%, plus ordinary income tax within your tax bracket for the 4011k withdrawal. Taking money out of a 401k for a down payment is not an exception to the 10% penalty. It is an expensive way to make a down payment.
In late January/ early February you will get a 1099R for the money you took out of the retirement fund.
To enter your retirement income, Go to Federal> Wages and Income>Retirement Plans and Social Security>IRA 401 k) Pension Plan Withdrawals to enter your 1099R.