Can I Avoid Early IRA Penalty to Buy First Home?


Dear 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% 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

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% 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.

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