The most frequently asked tax questions related to Home Ownership
For Tax Payers
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As a CPA, I came across this website and joined just last week, and I just came across your question.
First, assuming that you and your husband are each first-time homebuyers, you’re correct that you could use up to $10,000 from your traditional IRA penalty-free for a down payment.
Second, the mechanics of how to do it are a little more involved. If it were possible, I think the best course of action would be to have the bank transfer the money directly to the title company (or whoever is handling closing). This way, you never actually take possession of the money. If that were not possible, I’d have the bank make a check out to payee specified by the title company (or whoever is handling closing). A bank should be willing to at least do that much. If a bank was unwilling to do even that much, I suppose you could resort to taking out the money yourself, but then you leave yourself in a weaker position (from an audit perspective) if you were ever audited. Why put yourself in a position where you have to defend or explain or prove that you used the money correctly when you can avoid the problem altogether?
Third, come tax time next year, the bank should issue a Form 1099-R for the distribution. You’d have to prepare your tax return correctly, to report to the IRS that you qualify for the exception to the 10% early withdrawal penalty because you used the money for a first-time home purchase.
Finally, keep in mind that the $10,000 is a lifetime limit, to be used only one time.
Happy house hunting!
1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans do not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.
For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit http://www.irs.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.
This exclusion was scheduled to expire for debt discharged after December 31, 2012. ATRA, extends the exclusion to debt that is discharged before January 1, 2014.
The calculation of the exclusion is basically the number of months you lived in the house divided by 24 times the exclusion.
If married the total un-prorated exclusion is $500,000 if not married the total un-prorated exclusion is $250,000.
Therefore, if you are married and lived in the house for 1 year (12 months) then 12/24 x $500,000 = $250,000 exemption on the sale of your primary residence.