Re: Client withdrew 26,000 from a traditional IRA for first time home buyer purchased , distribution code says 1 on the 1099-R, in order to avoid the penalty it should be J. Is it that to avoid the penalty the distribution needed to be from a Roth IRA ?

No, Code 1 is probably correct for a traditional IRA if hes under 59½ years old.

The 26K is still taxable income, its just the penalty on 10K of it that you can get waived.  The penalty waiver is done on Form 5329.