Tapping an IRA to pay closing costs

Dear Chad,
The tax rules allow you to withdraw up to $10,000 from an IRA to purchase a first home and avoid the 10 percent penalty that usually applies to withdrawals when you are younger than 59? years of age. You still have to pay income taxes on the distribution.

To qualify for treatment as a first-time home buyer distribution, the distribution must meet all the following requirements.

Distribution requirements

1. It must be used to pay qualified acquisition costs before the close of the 120th day after the day you received it.
2. It must be used to pay qualified acquisition costs for the main home of a first-time home buyer who is any of the following.
a. Yourself.
b. Your spouse.
c. Your or your spouse's child.
d. Your or your spouse's grandchild.
e. Your or your spouse's parent or other ancestor.
3. When added to all your prior qualified first-time home buyer distributions, if any, total qualifying distributions cannot be more than $10,000. If you're married and both are first-time home buyers, each spouse can withdraw $10,000 penalty free.

Qualified acquisition costs include the following items: Costs of buying, building or rebuilding a home.
Any usual or reasonable settlement, financing or other closing costs.

Generally, you are a first-time home buyer if you had no present interest in a main home during the two-year period ending on the date of acquisition of the home that the distribution is being used to buy, build or rebuild. If you are married, your spouse must also meet this no-ownership requirement.

Since the rental property has not been your main home for the time that you have owned it, you can withdraw the funds penalty-free to buy the second property that will be your main home.