Owning a home is part of so many American dreams. For some though, it inches further and further out of reach as real estate prices rise at a much faster rate than their income grows. The First-Time Homebuyer Savings Account Act (FHSA) was passed in Colorado to help people who dream of buying their first home – and it all starts with a homebuyers savings account.
Today we’ll be laying out some facts to help you decide if it might be helpful for you.
What’s The Idea Behind The FHSA?
It makes a key change to the federal tax code to create 529-style homebuyer savings accounts for those who want to buy their first home. This 529 plan model has been very successful and continues to provide parents a tax-advantaged option to help save for their children’s college education. Now, this same idea can be applied to saving for a first home (this includes single‐family houses, condos, coops, townhouses, or mobile homes). It was signed into Colorado law in 2016; Virginia and Montana have similar laws.
How Does It Work?
An individual can deposit up to $14,000 in the homebuyers savings account each year. Married couples who file jointly may deposit up to double that amount each year (after taxes) into a first-time homebuyers savings account with a maximum lifetime investment of $50,000. They can even put their homebuyers savings account toward someone else’s first home – a child, grandchild, nephew, or even a friend.
This investment can grow up to $150,000 and any earnings on those funds — interest and capital gains — are completely free from Colorado state taxes (federal taxes still apply on the interest earned). There’s no time limit on how long the funds can remain in the account and these limits are adjusted for inflation. Keep in mind this homebuyers savings account can only be used to fund the down payment and any fees and costs (closing costs, inspections, lender fees, etc.) that come with purchasing a first home.
Who Qualifies As A First Time Homebuyer?
A first time homebuyer is someone who hasn’t purchased a home before. If you have owned a home, but did not purchase one – ex: if you inherited a home – you can still qualify. In addition, if you are divorced and previously have owned a home with your spouse, but haven’t been listed on a property title for at least three years, you qualify.
If you’re buying a home with someone who is previously owned a home, you’re still able to use your FHSA funds, as long as you qualify as a first time homebuyer.
How Are Homebuyers Savings Accounts Created?
These types of accounts are very simple to set up. And, bonus: first-time homebuyers can also designate just about any existing account as an FHSA. To create an FHSA, simply include the correct form when filing state taxes to indicate the account’s FHSA status – this will prevent any earnings (for instance, interest or capital gains) from being taxed.
Buying a first home is often not only a sound financial move for the new homeowners themselves, but has a much broader positive financial impact on our economy as a whole. Thanks to the FHSA, owning your first home might just be closer than you think!
DISCLAIMER: This article is intended as an introduction to the First Time Homebuyers Savings Account. This is not an offer to extend credit or a commitment to lend.