first time 10k ira withdrawl penalty free question....

[Chris Masons]

Regarding this insentive from IRS, I have a deal I am working on where I will be buying a 2 family and renting it with one tenant doing a contract for deed agreement to buy the property.

I am asking for 10k up front from tenant so I feel comfortable in that they will not walk or change their mind.

tenant says they can get the 10 from their traditional IRA, they do not have funds anywhere else.

My question is if we did a CFD they legally wouldn't own the property but would be under a contract to purchase it. so if you haven't guessed my question how does the IRS view this?

Would they get hit with the usual 10% penalty if they don't show legal ownership in their name? Or would the CFD contract satisfy the IRS definition of first time home purchase?

If not do you see any options to get around this issue? tenant is not in position to buy now but will be in 2 years or so. Their current lease is up in 3 months and we are hoping to get this deal done by then.

thx!

chris

[Steven Hamilton II]

Chris Masons,

In the view of the IRS, the contract will give them an equitable interest in the property. I'd recommend making sure you have your mortgage before the contract begins just for ease. Remind them however, they will still pay income tax on those IRA funds. You will also have to give them an amortization schedule for the contract and you will have to issue a 1098 reporting their interest paid. Yes, yours will be deductible as well.

You will fill out Form 6252 Installment Sale - www.irs.gov/pub/irs-pdf/f6252.pdf so be sure to bring a copy of the contract to your accountant/tax professional.

-Steven the Tax Guy

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