First of all, any withdrawal from the 401k that is made for an exception granted, ie the purchase of the first home, is not subjected to the 10% penalty.
However, this distribution is subjected to the regular tax rate!
So, if you take this early distribution for the purchase of your 1st home, I believe per the IRS exception rules, there should not be any early withdrawal 10% penalty, but would be subjected on regular tax on the amount of the distribution.
Capital Gains Tax on Sale of Principal Residence held for less than 2 years
However, from your question, it appears that you are planning to sell this home within a short period of time. As far as the IRS is concerned, there is another rule that states if you do not meet the qualifications of maintaining your principal residence for 2 years out of 5 years, then the gain on the sale of this principal residence would be subject to short term capital gains.
So, I would be very cautious in going about this transactions and would strongly urge that you seek a CPA's guidance in going through this transactions and provide him or her with your exact specific situation so as to avoid paying unnecessary capital gains taxes. By the way, the capital losses are not deductible!
Last edited by TaxGuru : 06-03-2007 at 02:36 AM.