The distribution is included in gross income; there is no exclusion in the law for using retirement account funds for this purpose. However, because you are over age 59½, there is no 10% early distribution penalty. Younger participants taking 401(k) withdrawals for home-buying costs are subject to penalty. The exemption from the 10% penalty only applies to withdrawals from IRAs for first-time homebuyers, and only up to $10,000.
Hobby expenses are deductible only up to income from the activity; loss deductions are not allowed.