Advice on allocation of funds from my IRA
First time home buyer here and my wife and I have been looking to buy a small multi family to house hacking. I may have found a great package deal on 2 multi family properties that I'm very interested in, however some of the money we would be using is coming from our Traditional IRA's and I dont want to incurr the early withdrawal penalty since there is another property included in the deal. Anyone dealt with this before or know a clear way I could structure the deal so that the IRS can clearly see that the money was used for our primary residence?
Most Popular Reply
Caleb, you are smart to pause before pulling money out of your IRA. Once you trigger taxes and penalties, you do not get a second chance to undo it.
Here is the simple way to look at it. The IRS allows up to ten thousand dollars from a Traditional IRA for a first time home purchase without the early withdrawal penalty. You still owe income tax on that amount, but you avoid the extra penalty. The key is that the money must be used toward buying or building your primary residence.
Now here is where your situation gets tricky. You are not just buying one property. You are buying a package with two multi family properties. From the IRS point of view, they do not care what you intend long term. They care how the funds are used and documented. If the withdrawal is clearly tied to the property you will live in as your primary residence, that is cleaner. If funds are blended across both properties with no clear separation, that can create confusion.
One practical approach is to structure the purchase so that your primary residence is clearly defined in the contract, settlement statement, and loan documents. In other words, make sure it is obvious on paper which property you are occupying and how much of your IRA funds went directly toward that purchase. Clean paperwork is your best friend here. The more simple and traceable the money trail, the better.
You may also want to talk with a CPA before moving the funds. Spending a few hundred dollars on good tax advice can save you thousands later. What is in it for you to slow down and structure this right is peace of mind. You get to house hack, build equity, and avoid writing a check to the IRS that you did not need to write.
Another angle to think about is whether you actually need to tap the IRA at all. There are ways to finance small multi family properties as an owner occupant with lower down payments, especially if you are living in one unit. Sometimes keeping retirement funds intact and using other financing options gives you more flexibility and less tax stress.
Have you already spoken with a lender about what down payment you would need on the property you plan to live in, separate from the second one?