I want to cash out my 401K and use the money to buy a second home. What penalties are applicable and is there any way to avoid them. I am 56

DON'T DO IT!

The cost in taxes will approach 50% of your distribution, as you will be taxed at your marginal tax rate (the tax you pay for the last dollar you earn in 2007) for BOTH federal and state taxes, PLUS a 10% Early Withdrawal Penalty.

There are cheaper ways to finance that second home, to include a normal mortgage.