First-Time Homebuyer

If you receive a qualified first-time homebuyer distribution from a regular IRA you don’t have to pay the 10% early distribution penalty even if you’re less than 59½ years old. And if you take a qualified first-time homebuyer distribution from a Roth IRA after you satisfy the five-year requirement, you don’t have to pay tax on the distribution.

To have a qualified first-time homebuyer distribution, you need to meet all of the following requirements, which are discussed below:

• The purchase must be a principal residence.
• The person for whom it is a principal residence must be the owner of the IRA or a family member (within limits).
• The person for whom it is a principal residence must be a “first-time homebuyer” (generally someone who has not owned a home in the previous two years).
• The purchase must cover “qualified acquisition costs.”
• The owner of the IRA may not treat more than $10,000 as qualified first-time homebuyer distributions (a lifetime limitation).
• The purchase must be made within the applicable time limit.

Principal residence

The qualifying purchase does not have to be a traditional home. For example, a houseboat may qualify for this purpose. But the purchase must be a principal residence. It can’t be a vacation home where you or your family member stay for a small part of the year.

IRA owner or family member

You can’t use this IRA distribution to buy a home for just anyone. It has to be for yourself, your spouse, your child, grandchild or ancestor, or your spouse’s child, grandchild or ancestor. If you choose to help a sibling, or a niece or nephew, the rule doesn’t apply.

First-time homebuyer

The rule only applies if the person who will use this home as a principal residence is a first-time homebuyer. This is not necessarily someone who has never owned a home, but it must be someone who has not owned a principal residence during the two-year period ending on the date of acquisition of the new home. If that person is married, the spouse must not have owned a principal residence during that period, either.

Qualified acquisition costs

This is a fairly easy requirement to meet. The amounts paid must be costs of acquiring, constructing, or reconstructing a residence, including any usual or reasonable settlement, financing, or other closing costs.

$10,000 limit

This rule is subject to a lifetime limit of $10,000. It appears that this limit applies to the IRA owner, not the purchaser of the home, if these are two different people.

Example: Your son needs $20,000 for the down payment on a home. For this purpose he will take $10,000 from his IRA and you will take $10,000 from your IRA. Assuming neither you nor your son has taken a previous qualified first-time homebuyer distribution, both distributions will qualify.

Example: Your son and daughter each need $10,000 for the down payment on a home. For this purpose you take $20,000 from your IRA. Only the first $10,000 will be a qualified first-time homebuyer distribution.

When you determine whether you are a first-time homeowner you must take into account any previous ownership of a principal residence by your spouse. But it appears that the $10,000 limit applies separately to each spouse.

Example: You need $20,000 for the down payment on a home. For this purpose you and your spouse each withdraw $10,000 from an IRA. If you meet the other requirements, both distributions can be qualified first-time homebuyer distributions.

It appears that if you are withdrawing from a Roth IRA for this purpose, only the amount of the distribution that exceeds your previous contributions counts toward the $10,000 limit.

Example: You have $14,000 in your Roth IRA, including $8,000 of contributions and $6,000 of earnings. If you meet the other requirements, you can use the entire Roth IRA for the purchase of a principal residence, using only $6,000 of your lifetime limit.

Time limit

Your distribution won’t qualify if you take the money out of the IRA too far in advance of the closing of your purchase. The payment must be used to pay qualified acquisition costs before the close of the 120th day after the day on which the payment or distribution is received from the IRA. If you take money out of your IRA and then run into a last minute snag that prevents you from using the money within this time limit, you’re permitted to contribute the money back to your IRA (or to a new IRA) within the 120-day limit and treat the distribution and contribution as a rollover. The 60-day rule that normally applies to rollovers will not apply, and this special rollover is disregarded when you apply the rule that permits only one rollover within a 12-month period.