To amend the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 to allow investments by certain retirement plans in principal residences of children and grandchildren of participants who are first-time homebuyers.

Summary: First-time Homebuyer Down Payment Assistance Act - Amends the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA) to exempt from prohibited transaction rules any home equity participation arrangement under which the trustee of a qualified plan, at the direction of the eligible participant, shall acquire an ownership interest (not to exceed $10,000, and repayable in full upon resale or other transfer) in any dwelling unit which within a reasonable period of time is to be used as the principal residence for a first-time homebuyer.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``First-time Homebuyer Down Payment 
Assistance Act''.

SEC. 2. EQUITY INVESTMENTS IN PRINCIPAL RESIDENCES FOR FIRST-TIME 
              HOMEBUYERS BY CERTAIN RETIREMENT PLANS.

    (a) Exemption of Investment From Prohibited Transaction Rules.--
Section 4975 of the Internal Revenue Code of 1986 (relating to tax on 
prohibited transactions) is amended by redesignating subsections (h) 
and (i) as subsections (i) and (j), respectively, and by inserting 
after subsection (g) the following new subsection:
    ``(h) Special Rule for Home Equity Participation Arrangements.--
            ``(1) In general.--The prohibitions provided in subsection 
        (c) shall not apply to any qualified home equity participation 
        arrangement to the extent that the amount paid to acquire the 
        ownership interest referred to paragraph (2)(A) does not exceed 
        $10,000.
            ``(2) Qualified home equity participation arrangement.--For 
        purposes of this subsection--
                    ``(A) In general.--The term `qualified home equity 
                participation arrangement' means an arrangement--
                            ``(i) under which the trustee of a 
                        qualified plan, at the direction of the 
                        eligible participant, shall acquire an 
                        ownership interest in any dwelling unit which 
                        within a reasonable period of time (determined 
                        at the time the arrangement is executed) is to 
                        be used as the principal residence for a first-
                        time homebuyer, and
                            ``(ii) which meets the requirements of 
                        subparagraph (B).
                    ``(B) Ownership interest requirement.--An 
                arrangement shall meet the requirements of this 
                subparagraph if the ownership interest described in 
                subparagraph (A)--
                            ``(i) is a fee interest in such property 
                        (and, in the case of an arrangement which is 
                        not otherwise at arm's length, the trustee's 
                        fee interest would be reasonable in an arm's 
                        length arrangement),
                            ``(ii) by its terms requires repayment in 
                        full upon the sale or other transfer of the 
                        dwelling unit, and
                            ``(iii) may not be used as security for any 
                        loan secured by any interest in the dwelling 
                        unit.
            ``(3) Definitions.--For purposes of this subsection--
                    ``(A) Eligible participant.--The term `eligible 
                participant' means an individual on whose behalf a 
                qualified plan is established.
                    ``(B) Qualified plan.--The term `qualified plan' 
                means an individual retirement plan or qualified cash 
                or deferred arrangement described in section 401(k).
                    ``(C) First-time homebuyer.--The term `first-time 
                homebuyer' means an individual who--
                            ``(i) is an eligible participant or 
                        qualified family member, and
                            ``(ii) had (and if married, such 
                        individual's spouse had) no present ownership 
                        interest in a principal residence at any time 
                        during the 2-year period before the date of the 
                        arrangement.
                    ``(D) Qualified family member.--The term `qualified 
                family member' means a child (as defined in section 
                151(c)(3)) or grandchild of the eligible participant 
                (or such participant's spouse). Section 152(b)(2) shall 
                apply in determining if an individual is a child or 
                grandchild of an eligible participant (or such 
                participant's spouse).
                    ``(E) Acquisition; etc.--
                            ``(i) Acquisition.--The term `acquisition' 
                        includes construction, reconstruction, and 
                        improvement related to such acquisition.
                            ``(ii) Acquisition cost.--The term 
                        `acquisition cost' has the meaning given such 
                        term by section 143(k)(3).
                    ``(F) Principal residence.--The term `principal 
                residence' has the same meaning as when used in section 
                121.''.
    (b) Investment Not a Loan Under Distribution Rules.--Section 72(p) 
of such Code (relating to loans treated as distributions) is amended by 
adding at the end the following new paragraph:
            ``(6) Special rule for home equity participation 
        arrangements.--Paragraph (1) shall not apply to a qualified 
        home equity participation arrangement to which section 
        4975(h)(1) applies.''.
    (c) Conforming Amendment.--Section 408(b) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1108(b)) is amended 
by adding at the end the following new paragraph:
            ``(14) Any qualified home equity participation arrangement 
        to which section 4975(h) of the Internal Revenue Code of 1986 
        applies to the extent that the requirements of paragraph (1) 
        thereof are met.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to arrangements entered into after the date of the enactment of 
this Act.