Buy A Home Using IRA Funds and IRA Penalties for Withdrawals Can Be Avoided

Q: Is there a provision in the current tax code that allows tax free withdrawal from an IRA for the purchase of a piece of real estate to use as my principal residence?

A: First-time buyers may make a withdrawal from an IRA for the purchase of a home or real estate they plan to use as their principal residence, but it isn’t tax free. You must pay any taxes that are owed on the withdrawal. However, if you’re under the age of 59 1/2, you do not have to pay the 10 percent penalty on the withdrawal as long as the cash is used to purchase property or real estate that will be used as a first home and as your primary residence.

You’re limited on the amount of money you can withdraw without penalty from an IRA to $10,000.

The idea behind the rule that allows withdrawals from IRA accounts to buy real estate and property was to allow those that had saved some money to buy a first home. But the money that was deposited in the IRA may not have been taxed when first deposited and the IRS will want to tax the money when the money is taken out of the IRA account. But the rule had limits and you could only withdraw up to $10,000 for the purchase of real estate if that property was going to be used as a first home and as a primary residence. The only benefit you get is not having to pay the early withdrawal penalty on the money if you are under 59 1/2 years old.

If you’re thinking about buying real estate or property as a first home to use as your primary residence and want to use the $8,000 first time home buyers tax credit, and have no other way to get the down payment cash you’ll need, this could be a good move – even if you have to pay taxes on the money. But you’ll have to hurry to take advantage of the $8,000 first time home buyer tax credit. That tax credit is due to expire on December 1, 2009, unless Congress decides to extend the $8,000 first time home buyer tax credit.

We will post updates on our site as news develops on the $8,000 first time home buyer tax credit and on other IRA tax issues along with other advice on personal finance issues and advice on real estate.

Learn more about IRA taxes and IRA penalties