If you’re not yet at the golden age of 59 ½ and you have an IRA account, you know that if you pull any funds from the IRA prematurely not only will you potentially be taxed on the proceeds but also hit with a penalty levied against the withdrawal. Yet there are times when you can tap into your IRA accounttapping into your IRA and not be assessed a penalty nor income taxes on the withdrawal as it relates to real estate. How so?

If you’re a first time home buyer, you can pull funds from your IRA for the required amounts needed for all or part of the down payment plus closing costs. The IRS limits the amount that can be penalty-free to $10,000 and $20,000 for couples with IRA accounts. While seasoned real estate investors have more than likely purchased a property and no longer considered a first time buyer, the rules regarding first time status look at the previous three years, not for the past 20 or 30. If you or your spouse haven’t owned a primary residence in the past three years, according to the rules, that makes you a first time homeowner. How does someone know if you’re a first timer with no primary residence over the past three years?

One way is to look at your income tax returns from the previous three years. Did you pay interest during that time to lenders? If so, the interest will be reported on IRS Form 1099-INT. It’s up to you to match the interest paid with any particular property but that’s easy enough to do.

This method doesn’t involve using a self-directed IRA to purchase investment property. That’s an entirely different way to use your IRA and one we’ve explored here on several occasions. But if this situation does indeed fit your situation, you can in fact help defray out of pocket expenses by using your IRA.