Dear Tax Talk,
Next month, my husband and I are purchasing our first home. I was planning on liquidating my IRA (it is less than $10,000) for money for the house. I'm confused about the "qualified acquisition expense" term. No Web site tells me what that truly means. They say it's for building or rebuilding. Is rebuilding another term for remodeling? We would like to use the money to remodel and not put down on the house. Is this allowed?
-- Hollie

Dear Hollie,
Generally, a withdrawal from an IRA before age 59½ results in a 10-percent penalty, in addition to the income tax due on the IRA withdrawal. Even if you are younger than 59½, you do not have to pay the 10-percent additional tax on up to $10,000 of distributions you receive to buy, build or rebuild a first home. The $10,000 limit is applied to each spouse separately, so together the penalty-free withdrawal could be as much as $20,000.

While income tax is still owed on the withdrawal, the income tax impact is reduced by the deductions allowed to homeowners, such as mortgage interest and taxes. With this in mind, it is better to time the withdrawal and the purchase early in the tax year so that a full year's taxes and interest are offset against the additional income.

To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements.

1. It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.
2. It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined later) who is any of the following:
1. Yourself.
2. Your spouse.
3. Your or your spouse's child.
4. Your or your spouse's grandchild.
5. 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.

Qualified acquisition costs include the following items.

Qualified acquisition costs

• Costs of buying, building or rebuilding a home. • Any usual or reasonable settlement, financing or other closing costs.

For example, a deposit paid to purchase a home is considered a qualified cost.

Generally, you are a first-time homebuyer if you had no present interest in a main home during the two-year period ending on the date of acquisition of the home that the distribution is being used to buy, build or rebuild. If you are married, your spouse must also meet this no-ownership requirement.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) 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 addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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