IRA $10000 -- Downpay Investment Property then IRA First home Purchase

[Brandon Cao]

Hello Everyone,

I have heard a lot about using $10,000 of IRA money penalty-free on your first home purchase. I have an interesting question that hopefully one of you can answer. I am currently under an unbreakable lease renting for another 6 or 7 months and would like to invest in a rental property in Philadelphia (within the next month or two).

So I will be putting down 20% cash (not IRA) purchasing my first investment property before buying a first principal home. It has already been pre-approved by the lender. My question is, would i still be able to use the $10,000 IRA money on technically a second house purchase that would be my first principal residence, if I buy the principal residence 6 months from now [i.e. after the investment property]?

I hope the answer is yes, as I do have the resources to handle the investment property and the IRA withdrawal.

[Steven Hamilton II]

Brandon C.,

Yes you can use the IRA money for your first time home purchase. That is for your primary residence only.

First home. Even if you are under age 59½, you do not have to pay the 10% additional tax on up to $10,000 of distributions you receive to buy, build, or rebuild a first home. To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements.
It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.

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.

Yourself.

Your spouse.

Your or your spouse's child.

Your or your spouse's grandchild.

Your or your spouse's parent or other ancestor.

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 (defined later), each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.
Qualified acquisition costs. Qualified acquisition costs include the following items.
Costs of buying, building, or rebuilding a home.

Any usual or reasonable settlement, financing, or other closing costs.

First-time homebuyer. Generally, you are a first-time homebuyer if you had no present interest in a main home during the 2-year period ending on the date of acquisition of the home which the distribution is being used to buy, build, or rebuild. If you are married, your spouse must also meet this no-ownership requirement.
Date of acquisition. The date of acquisition is the date that:
You enter into a binding contract to buy the main home for which the distribution is being used, or

The building or rebuilding of the main home for which the distribution is being used begins.

http://www.irs.gov/publications/p590/ch01.html

-Steven the Tax Guy

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