New investor Vacation home/ Short term rental buying with 401k

[Tammy Bentley]

My husband and I found a waterfront auction property that we purchased for vacation home/ possible short term rental.  We purchased for 135,000.00 with a 10% buyers premium( SEV 79,900) We  need to pay for within 30 days so we will pull money out of his 401K (He is 62), and then replace within 60 days, as long as the financing is on time, to avoid paying taxes.  I can see where we probably jumped the gun before doing enough research, but we are looking forward to having a place to use, and would like to  rent out a few weeks to help with expenses.  Any advice on how to maximize tax saving and make sure we don't mess this situation up?  Thanks!

[Michael Plaks]

@Tammy Bentley

When you say out of his 401k - are you talking about

a. 401k at the place he still works or

b. 401k from a place he used to work at but then rolled into an IRA?

If A - then you have to check with his employer regarding the requirements for borrowing from his 401k. If B - then the 60-day rollover is OK, as long as you carefully watch the 60-day deadline. The deadline is very strict, and the custodian must receive the money by the deadline.

If it's anything other than A or B - there could be some important complications.

Once you acquire the property, ideally you should limit your personal use to no more than the greater of:

1. 14 days, or
2. 10% of the total days you rent it to others at a fair rental price.

If you exceed this number, your tax deductions will be limited.

And when I say "personal use" it does not mean just you. It includes free or discounted use by friends and family. So if you let others use it, they should pay the full market price - or it can hurt your taxes, in addition to not bringing income.