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Second time for first-time homebuyer

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Q. I sold my home for a $175,000 gain in October 2004. I didn’t pay tax because of the home-sale exclusion. Now I’m looking to buy a bigger home. If I take part of the down payment for another home out of my IRA, can I still qualify as a first-time home-buyer? C.C.H., Newark, Del.

A. Yes, but you’ll have to wait awhile to get the best tax results. We’ll assume that you’re under age 591/2, so your IRA distributions would normally be subject to a 10 percent premature-withdrawal penalty. As you apparently realize, there’s a limited exception for so-called first-time home-buyers. The IRS says you qualify if you haven’t owned a home as your principal residence for at least two years prior to the purchase, regardless of any earlier home ownership. So you should wait until October of this year to buy a new home, and then take a penalty-free IRA withdrawal of up to $10,000 to pay part of the cost. Tip: The first-time home-buyer exception only covers lifetime distributions of up to $10,000. Also, any penalty-free IRA distributions under this rule are still subject to regular federal income tax.

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