1099 R as housing allowance

[AQUI]

my active minister client brought a 1099 R stating the financial company told him he can use the total amount withdrawn as housing allowance to purchase a house.  Can someone advice on this matter?  I have not find any documentation that support the assertion from the financial company.  I know he can use part of the withdrawn amount as down payment, and to cover all related expenses to maintain the house.  Does any one know what percentage can be used as down payment?.  Thanks,

[itonewbie]

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@AQUI wrote:

my active minister client brought a 1099 R stating the financial company told him he can use the total amount withdrawn as housing allowance to purchase a house. 

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Housing allowance has nothing to do with this.  Also, not for the total amount, only up to the lifetime limit of $10,000 for first-time homebuyers.  And there are conditions.  Normal taxation rules for distributions still apply, just that early distribution penalty would not be assessed.

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I know he can use part of the withdrawn amount as down payment, and to cover all related expenses to maintain the house. 

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This is not correct.  The exception is only for qualified acquisition costs.  Expenses for maintaining the house would not qualify.

[qbteachmt]

You have some reading to do.

What is it being paid out of? Who is paying it out? Who paid into it?

https://pastorswallet.com/claiming-a-ministers-housing-allowance-in-retirement/

https://cs.thomsonreuters.com/ua/ut/cs_us_en/ius/proc/retired-minister-housing-allowance.htm

Highlights:

A retired minister may receive rent-free use of a home or a rental allowance in recognition of past services as a minister. The lesser of the designated allowance, the fair rental value of the home, or the actual expense of maintaining the home is excludable from income. The taxable amount of any retirement distribution is reduced by the amount of a designated housing allowance.

Contributions you make to a church retirement plan, usually a 403(b)(9), as a pastor are a part of your pastoral income. So, when you take them out in retirement they are still considered eligible pastoral income. Any pension your church or denomination pays you is something that you earned through your ministerial work and part of your compensation as well. Also, if you use part of your church pension to purchase a commercial annuity, those annuity payments generally qualify for the housing allowance as well, since they were bought with your ministerial income.

You cannot take a housing allowance from an IRA in retirement, even if you used your pastoral compensation to fund it. Neither can you claim a housing allowance from your Social Security benefits, even if you paid into the system as a pastor.

The housing allowance must be officially designated in advance by the employing church or other qualified organization. The IRS has ruled that the board of a national denominational pension fund is qualified to make a housing allowance designation for a pastor. They determined that the pension fund met the requirements of being an “employing church” and the fund trustees were acting on behalf of local churches. Revenue Ruling 63-156 also allows for an independent or nondenominational church to designate a housing allowance for their retired clergy. 

[qbteachmt]

Oh, I see you stated "active" but these resources help you understand the underlying considerations. And your taxpayer client needs a new financial advisor.

[AQUI]

thank you.  Where can i read about the time life limitation of $10,000.?

[AQUI]

Thank you.  The minister is still active.  He got the wrong information.   Thanks for the link.  However, can the retired minister still get some housing?

[itonewbie]

It's in §72(t).  Search for IRS pub on retirement distributions and you should find it too.

[itonewbie]

@AQUI Michelle already gave you some very helpful information and links for retirement.  So, the answer is yes.

[qbteachmt]

"Where can i read about the time life limitation of $10,000.?"

That's not exactly how it reads.

Read the IRS instructions. Pub 590-A is for contributions and money in. 590-B is for distributions and money out. Also use the IRS Tax Topics. You can always google, too:

IRS IRA distribution exceptions

And get:

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distri...

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals

And I really like investopedia articles:

https://www.investopedia.com/articles/personal-finance/110415/can-you-use-your-ira-buy-house.asp

[itonewbie]

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@qbteachmt wrote:

"Where can i read about the time life limitation of $10,000.?"

That's not exactly how it reads.

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@qbteachmt The $10,000 lifetime limit is in relation to §72(t) early distribution penalty exception for first-time homebuyers as defined under that code section.

[qbteachmt]

My point being, there are more eligibility factors for the taxpayer, for this to be a qualified first time home buyer and avoiding an early withdrawal penalty.

It's not only that there is a lifetime limit (per person), For instance, we were told only 1099-R. Not what sort of plan or account. That's why it helps to do your own research, for how it applies to your taxpayer.

If you qualify as a first-time homebuyer, you can withdraw up to $10,000. Because IRAs are individual retirement accounts, your spouse can also withdraw up to $10,000 from an IRA.

First time homebuyer distribution is not an exception if taken from Qualified Retirement Plans (401(k), etc). Only from IRA, SEP, SIMPLE IRA. And Roth have different provisions (distribution ordering, 5-year rules) for early distributions.

The money must be used to buy, build, or rebuild a home within 120 days of its receipt, to pay qualified acquisition costs associated with the first-time purchase of a principal residence. Not a vacation or second home.

It can qualify for the exemption if the money is to help a home buyer who is an eligible child, grandchild, or parent buy a home, even if you're a homeowner now.

It's for a principal residence only. The term principal residence means the same as it does for calculating the excludability of gain on sale under section 121.

You are considered a first-timer if you (and your spouse, if you have one) haven't owned a home (principal residence) at any point during the past two years. (The two-year period ends on the date of acquisition of the home you are looking to purchase.)

[itonewbie]

Agree there are various conditions.  That's why the OP was directed to refer to the following:

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@itonewbie wrote:

It's in §72(t).  Search for IRS pub on retirement distributions and you should find it too.

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