I'm in the process of purchasing a home and I need to put 5% of the value down to be held in escrow until the deal closes. This money can then either be refunded back to myself or be rolled into the down-payment. I know that as a first time home buyer I can withdraw $10,000 without the 10% penalty, but the money has to be used within 180 days. In the event that the deal takes longer than expected (around 55 days from date of offer acceptance) or the deal falls through, how does the IRS treat the $10,000 that is still outstanding? Would it have to be immediately redeposited or could it be held in escrow until another deal goes through?
If you received a distribution to buy, build, or rebuild a first home and the purchase or construction was canceled or delayed, you generally can contribute the amount of the distribution to an IRA within 120 days of the distribution. This contribution is treated as a rollover contribution to the IRA.
This is from my friend, Publication 590. See Page 51, next to 'TIP' in second col.