I'm Anne. I've been preparing taxes for 27 years and I'll be happy to help you.
Unfortunately, you must pay income tax on the distributions you took from your 401K monies, since they were put into the 401K PRE-TAX.
Since you are over the age of 59 1/2, you will NOT have to pay any penalties on the money that you took from the fund.
There is no avoiding the income tax on distributions from a 401K. Please see below:
However, you may be able to recoup at least part of your investment in the properties should you choose to charge you Mother and daughter rent at Fair Market Value.
I know this was not the answer you were hoping for. Please know that if there were any legal way to NOT pay tax on a distribution from a 401K plan, it would be my pleasure to tell you so.
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