First-time home buyer? Talk to your CPA.

Your Guide to State, Local, Federal, Estate + International Taxation

Buying a home can be a stressful process, especially if it is your first time. In a normal market, the administrative, legal, and financial requirements are enough to overwhelm even the most prepared home buyers. And as we all know, the real-estate market has been anything but normal lately. This has further increased the financial barriers that a first-time home buyer experiences when trying to close. However, there are certain exclusions specifically written in the tax law for first-time home buyers that could help lower some of these barriers.

Don’t miss: Changes to the mortgage interest deduction

For the purposes of these exclusions, the IRS defines first-time home buyers as those who have not owned a home as their principal residence at any point during the two preceding years. This is good news, as you don’t have to be a literal first-time home buyer to benefit from some of these exclusions.

If you have a traditional Individual Retirement Account (IRA), you may know that withdrawing money from it before you reach the age 59 ½ results in a 10% early withdrawal penalty on the total amount withdrawn. However, if you are a first-time home buyer, you can withdraw up to $10,000 from your traditional IRA penalty-free before age 59 ½ if the funds are used to acquire a home. You will still owe regular income tax on the amount you withdraw but avoiding the early withdrawal penalty is a great benefit. One last caveat is that this exclusion can only be used once in your lifetime, so deciding when to use this requires some careful planning.

Along the same lines, there are also benefits for those who have Roth IRAs. Regardless of the first-time home buyer exclusion, if you have held your Roth IRA for at least five years, you can withdraw up to 100% of the contributions you have made to the account tax and penalty free for any purpose. However, if you withdraw any of the account’s earnings (not the contributed principal) before age 59 ½ you must pay the 10% penalty on the amount of earnings withdrawn. The first-time homebuyer exclusion allows you to withdraw up to $10,000 of the account’s earnings penalty free if the funds are used to purchase a home. In short, you won’t pay any regular income tax or the 10% penalty on the $10,000 withdrawn from your Roth IRA.

One last thing to keep in mind is that funds withdrawn from your IRA (whether traditional or Roth) that qualify for the first-time home buyer exclusion must be used within 120 days of when you receive them to avoid penalties. With all the different rules and timing considerations, consider consulting your CPA before you jump into buying a home. You may be able to use one of these exclusions to financially assist you as a first-time home buyer.

If you are considering buying a home for the first time and have any question regarding the qualification and timing requirements of these exclusions, reach out to your Henry+Horne advisor.

Sabrina Boever, MT