First time homebuyer Tax Law: Need help

Vendor · Houston, TX · Member since 2017 · 20 posts · 7 votes

My wife and I are looking for a house hack property in Houston or Galveston. This will our first time buying a home, so we are very green at this.

We are using my IRA account to fund our down payment. I understand that first time home buyers are eligible to withdraw up to $20,000 penalty free. However, I am can't find any clarification on these two questions.

1) Do we have to pay taxes on the $20,000 withdrawal as it is recognized as income?

2) Do we have to live in the property to qualify for the penalty free exemption?

Anything else we need to know?

Thanks,

Frank & Robin

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Dmitriy Fomichenko

Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes

Hey Robin, you got some good info already here. Just to clarify on your #2: I don't think what Paul state is accurate for your situation. That applies to exclusion on capital gain taxes for primary residence. However if you are using funds from an IRA for the purchase of primary residence - it has to be your residence from day one, so yes, you have to be living in the property.

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Paul Allen
Financial Advisor · Virginia Beach, VA · Member since 2017 · 502 posts · 508 votes
9y
IRC Section 72(t)(2)(f)
You are limited to $10,000 per IRA
Yes, you will pay taxes on the withdrawal(s)
para (8) says to use the section 121 definition of principal residence. Section 121 indicates you have to live in the property for 2 of 5 years. I'm not sure if the IRS translates that directly, but I would be cautious.
Best of Luck on Your Journey!
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
9y
Robin,
For both traditional and roth IRA, you do not have to pay taxes on your withdrawal.
If you need more detail see below:
You must meet all the following requirements.
1. Money must be used to pay pay for the house before the close of the 120th day after the day you received it.
2. It must be used to pay for the main home of a first-time homebuyer who is any of the following. a. Yourself. b. Your spouse. c. Your or your spouse's child. d. Your or your spouse's grandchild. e. Your or your spouse's parent or other ancestor.
3. When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions cannot be more than $10,000. If both you and your spouse are first-time homebuyers each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.
Any advice contained in this post is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this document.
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
Hey Robin, you got some good info already here. Just to clarify on your #2: I don't think what Paul state is accurate for your situation. That applies to exclusion on capital gain taxes for primary residence. However if you are using funds from an IRA for the purchase of primary residence - it has to be your residence from day one, so yes, you have to be living in the property.
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Robin Edwards
OP
Vendor · Houston, TX · Member since 2017 · 20 posts · 7 votes
9y
All - Thank you for the responses thus far. I want to make sure I am totally clear on this.
1) We will be funding our down payment from a traditional IRA(s).
2) We understand these monies are exempt from penalty should we use them to purchase a primary residence. We understand the difference between penalty and taxes. The taxes on withdrawals from traditional IRAs are unavoidable.
3) We have read that if both individuals are first time home buyers, we are both eligible to be exempt from penalty on up to $10,000. Robin and I are both first time home buyers.
Question: Do we both need to separately withdraw $10,000 from our IRAs if we are attempting to take advantage of to total penalty exemption ($20k)... OR... can all the funds be pulled from one IRA account?
Thanks,
Frank and Robin
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Paul Allen
Financial Advisor · Virginia Beach, VA · Member since 2017 · 502 posts · 508 votes
9y
https://www.law.cornell.edu/uscode/text/26/72
(ii) Principal residence
The term “principal residence” has the same meaning as when used in section 121.
>>>>>>>>>>
Does that mean you have to live in the house for 2 years - I am not sure. I have not been able to locate any tax court rulings on the matter.
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Dmitriy Fomichenko
Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
9y
Robin, there is no such thing as joint IRA. All IRAs are individual. You have an IRA in your name only. Your wife has an IRA in her name only. If you pull $20K from your IRA you will get first $10K penalties free if used for the purchase of primary residence and next $10K will be penalized.
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Robin Edwards
OP
Vendor · Houston, TX · Member since 2017 · 20 posts · 7 votes
9y
In summation, my main take aways from this thread are:
1) My spouse and I will be required to live in the 1st house we buy, effective day 1 of closing on it.
2) My spouse and I will need to individually withdraw $10K from our respective IRA accounts (for tax tracking purposes) in order to receive the monies penalty free, BUT we will be required to pay the regular taxes on the additional income of the $20K.

Is this accurate? Inaccurate? Bueller? Thanks to all in advance.
-Frank and Robin
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