Can you get a tax break while saving for your house? The answer would be “yes”, depending on which state you are living right now!
Ask yourself, are you getting stressed due to the rising home prices and thinking about how to handle the down payment crisis? Don't worry, your state may help you with this issue and get you tax benefits.
You might hear of a program called "First-Time Home Buyer savings account or FTHSA." This program is dedicated to providing tax exemptions to the home buyers who intend to buy a new home but having issues with the down payment.
Many state legislatures happily authorized this home buyers program. Those states have approved FTHSA, which provides funds to the eligible home buyer for making the down payment along with closing costs.
All participating states also keep sharp eyes over the fund distribution. If a home buyer uses the fund for non-qualified reasons, the tax exemptions on that portion of the fund will be charged back along with a huge penalty.
For example – most of the states require that the money should be used only for buying homes within that state and before a specified time. If any buyer fails to do that, he/she will have to face the consequences. But there are exceptions.
Why have several states supported this FTHSA program?
First-time buyers are becoming the smallest part of the total home buying market. As per a survey by the National Association of Realtors in 2017, the market share of first-time buyers is only about 32% in 2017. That is 8% lower than the long-term average.
A recent report provided by the Urban Institute was revealed in 2017, 53% of renters are unable to pay the down payment required to buy a home. Saving for a down payment is getting harder day by day for young adults, especially for students.
So, this is the prime reason why the First-Time Home Buyer savings account program has a huge fan following and it’s growing day by day.
The program was authorized by the states by considering few probable factors like rising home prices and increasing debt level.
Another factor might be the student loan debt which came in the path of homeownership for college goers. So, this new home buyers program might help to ease up the situation.
Consumers might have a confusion about how far this program can help its target audience. Can it be used by the rich people as an option to save money on tax?
To solve this issue, states have maintained two different models of this program.
The first model is designed to serve larger savings accounts with limited tax benefits. The second model delivers lower saving limits but with greater tax benefits.
How much is this FTHSA program useful to you?
If you open an FTHSA or First-time Home Buyer Savings Account, you have chosen a good option to save for your first home down payment.
The purpose of your account
An FTHSA is a home buyer friendly, a unique type of savings account designed by the US states.
The program is dedicated to rendering helping hand to the new home buyers so that they can easily save money in their first homes.
The program includes provisions for the new homebuyer individuals, and homeowners to contribute in such account. The deposit is tax-deductible and can be used to buy a first home by a specific person.
The eligible costs that can be paid by using that fund include the closing costs and the down payment for buying a single-family home.
The cost of construction of a new home may also be included.
The benefits of an First-Time Homebuyer Savings Account
The account has a few important benefits such as:
- The account bears interests.
- An account holder may exclude his adjusted gross income yearly deposits (taxes) from the FTHSA. Married joint account holders may also have that facility and get a deduction if they file a joint tax return.
- Income from interest earned on an FTHSA is also exempt from tax in other states.
- Few states have maximum deposit limits, but few don’t.
Who can use the fund deposited in a First-time Homebuyer Savings Account?
Apart from the account holder, each account must have a designated qualified beneficiary. To become a qualified beneficiary, an individual must live in the same state. There are other factors also, depending on the state laws.
Apart from the benefits you’ll be getting under the laws, you are entitled to receive a dedicated first-time homebuyer specialist who can guide you through the entire process.
Which states have already offered the FTHSA program?
Till date, few states have offered first-time home buyer savings accounts program for their people. The states are Colorado, Montana, Virginia, Iowa, Minnesota, and Mississippi. Iowa, Minnesota, and Mississippi passed the legislation in 2017; other states have authorized the program earlier.
Colorado, Minnesota, and Virginia follow the first model with bigger savings and low tax benefits.
On the other hand, Iowa, Mississippi and Montana follow the other model with greater tax benefits and smaller savings.
Let's check out the details:
| Name of state | Deposit amount | Tax break limit | Additional Information | Colorado | $14,000 | Deposited amount is taxable, but not the earned interest | Home should be in the same state |
|---|---|---|---|
| Minnesota | $15,000 | Deposited amount is taxable, but not the earned interest | Home should be in the same state |
| Virginia | No limit | Deposited amount is taxable, but not the earned interest | Home should be in the same state |
| Iowa | No limit & non taxable | $2,000 for a qualified individual and $4,000 for a married, joint account holder | Fund should be used to buy homes within 10 yrs. After that time it’ll be taxable. Non-authorized usage of the fund will be penalized by 10% of the total deposit. |
| Mississippi | No limit & non taxable | $2,500 for a qualified individual | Fund should be used to buy homes within 10 yrs. After that time it’ll be taxable. Non-authorized usage of the fund will be penalized by 10% of the total deposit. |
| Montana | No limit & non taxable | $3,000 for a qualified individual | Fund should be used to buy homes within 10 yrs. After that time it’ll be taxable. Non-authorized usage of the fund will be penalized by 10% of the total deposit. |
New York recently has passed a similar program for new home buyers. Other few states like Alabama, Louisiana, Michigan, Missouri, Pennsylvania, and Oregon are also taking the matter seriously and considering similar laws.
So, if you are one of the citizens of these states, and you are in a desperate need of a home, you can contribute into a First-time Home Buyer Savings Accounts.
Trust me, your money will be saved, you’ll get a tax break due to saving for a home, and will become a homeowner.