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What is the IRS definition 'main home'?


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#1 ronklob

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Posted 19 October 2009 - 12:08 PM

Hello,

I've been trying to find the answer to this question, to determine if I should use my IRA for a Home Purchase. 

The IRS' definition of a 'first-time homebuyer' is someone who has 'no present interest in a main home' for 2 years (paraphrasing). 

My interpretation of 'main home' is 'primary residence'.  Is this correct? 

My wife and I bought a house 5 years ago, then subsequently had to move due to work 2.5 years ago.  We have since maintained that house as a rental/investment property and have been renting in our current location.  Since we transferred the house from a primary residence to an investment property, does this open us to the 'first-time homebuyer' exception for early distribution? 

Thanks

Ron



#2 GuessAgain

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Posted 19 October 2009 - 12:56 PM

What is the definition of a first-time home buyer?

The
law defines "first-time home buyer" as a buyer who has not owned a
principal residence during the three-year period prior to the purchase.
For married taxpayers, the law tests the homeownership history of both
the home buyer and his/her spouse.

For example, if you have not
owned a home in the past three years but your spouse has owned a
principal residence, neither you nor your spouse qualifies for the
first-time home buyer tax credit. However, unmarried joint purchasers
may allocate the credit amount to any buyer who qualifies as a
first-time buyer, such as may occur if a parent jointly purchases a
home with a son or daughter. Ownership of a vacation home or rental
property not used as a principal residence does not disqualify a buyer
as a first-time home buyer.


See http://www.federalho.../2009/faq.php#2


#3 Tax_Counsel

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Posted 19 October 2009 - 10:02 PM

Unfortunately, the information GuessAgain provided does not apply to your question. That definition of "first-time homebuyer" applies for the first-time home buyer credit. While similar, it is not exactly the same thing. In particular, the first-time homebuyer credit has a 3 year rule for defining a first-time homeowner, whereas the first-time homebuyer exception for IRA distributions uses a 2 year rule for defining first-time homeowner. In the tax law, one cannot assume that the same term (in this case "first-time homebuyer") used for one provision means exactly the same thing in another. Often it does not.

ronklob is asking for the exception to the penalty for early IRA distributions for buying or building your first home. The rules for that are a bit different.

The definition ronklob paraphrased is, I assume, the one from IRS Publication 590, which discusses IRAs. In discussing the first time home-buyer exception to the 10% early withdrawal tax (commonly referred to as the 10% early withdrawal penalty even though it is, technically a tax and not a penatly) it defines first-time home-buyer as follows: "First-time homebuyer.   Generally, you
are a first-time homebuyer if you had no present interest in a main
home during the 2-year period ending on the date of acquisition of the
home which the distribution is being used to buy, build, or rebuild. If
you are married, your spouse must also meet this no-ownership
requirement."

Unfortunately, the publication does not define "main home." This is one of those instances where the publication writers tried to simplify the publication a bit too much. Had they quoted more directly from the Internal Revenue Code (IRC), the answer to your question would be much more clear. The exception from the 10% early withdrawal tax for distributions from IRAs to buy your first home is in IRC § 72(t)(8). The relevant definitions are in subparagraph (D):

(D) First-time homebuyer; other definitions.--For purposes of this paragraph--

(i) First-time homebuyer.--The term “first-time homebuyer” means any individual if--

(I)
such individual (and if married, such individual's spouse) had no
present ownership interest in a principal residence during the 2-year
period ending on the date of acquisition of the principal residence to
which this paragraph applies, and

(II) subsection (h) or (k) of section 1034
(as in effect on the day before the date of the enactment of this
paragraph) did not suspend the running of any period of time specified
in section 1034
(as so in effect) with respect to such individual on the day before the
date the distribution is applied pursuant to subparagraph (A).

(ii) Principal residence.--The term “principal residence” has the same meaning as when used in section 121.

(iii) Date of acquisition.--The term “date of acquisition” means the date--

(I) on which a binding contract to acquire the principal residence to which subparagraph (A) applies is entered into, or

(II) on which construction or reconstruction of such a principal residence is commenced.







So, to answer your question, "main home" as used in the publication means "principal residence", not primary residence. And principal residence here means the same as it does for § 121, which is the section that gives you a capital gain exclusion (up to $250,000) when you sell your principal residence. The first-time homebuyer credit in IRC section 36 also uses the term "principal residence" and that section also says that it means the same as it does for IRC § 121. So, what is the definition of "personal residence" in § 121? Interestingly, the code section itself does not have a specific definition. So, while Congress wanted the term "personal residence" to mean the same thing for all three sections, it did not provide a definition for it.

Instead, it left that task to the Treasury, which issued Treasury Regulation § 1.121-1(B), which provides in relevant part:
(B) Residence--(1) In general.
Whether property is used by the taxpayer as the taxpayer's residence
depends upon all the facts and circumstances. A property used by the
taxpayer as the taxpayer's residence may include a houseboat, a house
trailer, or the house or apartment that the taxpayer is entitled to
occupy as a tenant-stockholder in a cooperative housing corporation (as
those terms are defined in section 216(B)(1)
and (2)). Property used by the taxpayer as the taxpayer's residence
does not include personal property that is not a fixture under local
law.

(2) Principal residence.
In the case of a taxpayer using more than one property as a residence,
whether property is used by the taxpayer as the taxpayer's principal
residence depends upon all the facts and circumstances. If a taxpayer
alternates between 2 properties, using each as a residence for
successive periods of time, the property that the taxpayer uses a
majority of the time during the year ordinarily will be considered the
taxpayer's principal residence. In addition to the taxpayer's use of
the property, relevant factors in determining a taxpayer's principal
residence, include
...[Message truncated]


#4 ronklob

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Posted 20 October 2009 - 01:45 AM

Wow, TaxCounsel.  Thank you, Thank you, Thank you!

That was exactly what I was looking for, and wasn't able to find with my feeble tax law Google-foo.  You pointed out the same weak points I was finding, and tied it all together with the one piece of information I had trouble finding.  And you put it in a form that my wife and I can understand. 

Thank you so much for taking the time to put all of that together.  You have truly helped us. 

Ron





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