retirement

Avoid early IRA withdrawal penalty for home

Judy O'ConnorDear Tax Talk,
In 2011, I entered into a land contract. I claimed property tax deductions on my taxes for 2011 and 2012, as they were part of my monthly payment to the owner. However, in summer 2013, I voluntarily surrendered the land contract (which was not in default), as I needed to move out of state, effectively ending my right to buy the property and transfer the deed. I did not claim any property tax deduction for 2013.

In July 2014, I am closing on a home purchase with an FHA loan. I would like to take an early IRA withdrawal to cover the down payment, and I'm hoping to avoid the 10 percent penalty based on the first-time homebuyer exception. Is this OK, given that my land contract was never completed? Thank you for your assistance.
-- Marcy

IRA egg and money in nest © Don Mammoser/Shutterstock.com

Dear Marcy,
If you meet all the requirements of being a "first-time homebuyer," you can avoid paying the early IRA withdrawal penalty. The 10 percent additional tax penalty will not apply on up to $10,000 in early distributions from your IRA.

The "first-time homebuyer" term is a misnomer because the IRS has its own definition, and it means you had no present interest in a main home during the two-year period ending on the date of acquisition of your new home. You had a "land contract" and if there was no home there, then you should be able to meet the requirements. If there was a home there, you need to determine if you had a "present interest" in the property, which means you had an unrestricted right to the immediate use of the property. You will have to look at the contract very carefully and might want to consult a legal professional to be sure on that one.

There are some other requirements you need to know. The IRA distribution must be used to pay qualified acquisition costs before the close of the 120th day after you receive the funds. Additionally, you have a limit of $10,000, which includes all prior "first-time homebuyer" qualifying distributions.

Thanks for the great question and I hope this works out for you.

Ask the adviser

To ask a question on Tax Talk, go to the "Ask the Experts" page and select "Taxes" as the topic. Read more Tax Talk columns.

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.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement
CD & INVESTING NEWSLETTER

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

Blog

Jennie Phipps

Get your shots and stay healthy

Vaccinations are free for Medicare participants and people insured under the ACA.  ... Read more

advertisement
Partner Center
advertisement

Connect with us