What is the pentaly for taking out money from a 401K to reinvest in a rental property (real estate)?

House purchasing is suppose to tax free. Just looked into it with my 401k. You should however check with your investment advisor. Good luck.

Check with your 401(k) plan administrator if they allow self-directed 401(k). With self-directed 401(k) you take your own investment decisions. Section 408 of the Internal Revenue Code permits individuals to use a self-directed retirement plan to purchase land, commercial property, condominiums, residential property, mortgages, trust deeds, real estate contracts or private placements and many other types of investments. However, you can not use the property for personal use or for the use of relatives.
Read Your U.S. Tax Return: Elective Deferrals 401(k) Plans (http://taxipay.blogspot.com/2008/08/elective-deferrals-401k-plans.html)

Check with your 401(k) plan administrator if they allow self-directed 401(k). With self-directed 401(k) you take your own investment decisions. Section 408 of the Internal Revenue Code permits individuals to use a self-directed retirement plan to purchase land, commercial property, condominiums, residential property, mortgages, trust deeds, real estate contracts or private placements and many other types of investments. However, you can not use the property for personal use or for the use of relatives.
Read Your U.S. Tax Return: Elective Deferrals 401(k) Plans (http://taxipay.blogspot.com/2008/08/elective-deferrals-401k-plans.html)

I have not heard of self-directed 401(k) that allows individuals to invest in real property (other than a REIT). I plan to research this because it could be a very valuable finanical planning tool. I have always told my clients that they are only allowed to take a $10,000 penalty free distribution from a 401k for the purchase of their first home.

First not all plans permit inservce withdrawals. Some only permit hardship withdrawals. Second, IRAS allow you to take money out penalty free for 1st home purchase byt 401Ks do not.

Some 401Ks do permit selef directed investment. But I don't think a direct real estate purchase, even for investment purposes would qualify.

Therefore, you would pay the 10% penalty, plus add the amount to taxable income.