What is a First-Time Home Buyer Savings Account?

What is a First-Time Home Buyer Savings Account?

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A first-time home buyer savings account is a tax-advantaged savings account that incentivizes home buyers to save toward their future home purchase. Funds saved in these accounts can be applied, on a tax-advantaged basis, toward the down payment and closing costs of your first-home. Whether you have access to these accounts will vary by your state of residence.

If you’re saving up for your first home, your state may have launched its own First-Time Home Buyer Savings Accounts for down payments and other eligible expenses. In this article, we cover where these accounts are currently offered, the associated tax benefits and how you can set up your own tax-advantaged home buyer savings account. Legislation for these accounts is currently ongoing in multiple states, so check back regularly if you don’t see yours mentioned.

How Do First-Time Home Buyer Savings Accounts Work?

First-Time Home Buyer Savings Accounts, or FHSAs, help home buyers save for their first home purchases on a tax-advantaged basis. Money in these accounts can be used for down payments and eligible closing costs, including origination fees, underwriting fees, title and escrow fees and more. Individual states differ on what can and cannot be deducted, however once the funds are used, another form must be filed with the state, showing that the funds were used for approved purposes.

It's a good idea to make sure you budget appropriately to ensure you won't need to draw on your FHSA in an emergency. If the money in these are accounts is withdrawn and used for a non-qualified purpose, or any expense not related to your home purchase; the withdrawn funds will be declared taxable, and the offender will be charged a withdrawal penalty of 5%–10% of the withdrawn amount. Penalties may vary by state.

When introducing FHSAs, states have chosen to adopt one of two different models.

  • Larger contributions; limited tax benefits
  • Limited contributions; greater tax benefits

In either model, the prospective home buyer benefits by being able to save for their first home on a tax-advantaged basis, enabling a greater portion of their earnings to be applied toward closing costs.

Who Qualifies for a First-Time Home Buyer Savings Account?

FHSAs are generally targeted toward young adults who have trouble saving for a down payment due to student loans, rising rents or other expenses. However, there are no age restrictions, so anyone of the age of majority, who has never purchased a home before, generally qualifies as a first-time home buyer and is eligible for an FHSA.

Eligible home purchases include single-family homes, townhouses, condos and co-ops as well as mobile homes in some cases.

The definition of first-time home buyer may also vary state-to-state. For example, buyers in Colorado who have inherited a home, or owned a home with a spouse but was thereafter divorced, may still qualify as a first-time home buyer. Owners of commercial property and land may also be considered first-time home buyers if their property wasn't used as a residence. It's a good idea to check with your state for more details if you have any questions on whether you qualify.

How Do You Get a First-Time Home Buyer Savings Account?

You can either open a new savings account through your local bank, or designate an existing savings account as an FHSA. As a FHSA is simply a regular savings accounts that you declare as an FHSA to your state's tax authorities, it's easy for you to get an FHSA almost anywhere, provided your state offers them. Certain states, like Oregon, may require that the account be with a bank or credit union located within that state.

States will typically require a special FHSA tax-form be filed alongside your state tax return. This will exempt you from taxes on earnings contributed to the account, interest earned on the account or capital gains related to the account. FHSA forms typically need to be filed annually in order to comply with your state tax regulations.

Which States Currently Offer Home Buyer Savings Accounts?

State legislatures across the country recognize the positive economic impact of home buying in their communities and have proposed bills that create First-Time Home Buyer Savings Accounts. As these bills make their way through House and Senate deliberations, and ultimately onto the Governor’s desk, more states will define how their programs will be structured and supported.

The following states have enacted legislation establishing First-Time Home Buyer Savings Account programs.

Tax Benefit
Deadlines for Use
Withdrawal Penalty
  • Deposits taxed
  • Interest earnings not taxed
  • Individual: $14K max ($50K cap)
  • Individual: $2K max deductible
  • Joint: $4K max deductible
No limit10 yrs10%
  • Deposits taxed
  • interest earnings not taxed
  • Individual: $14K max ($50K cap)
  • Joint: $28K max ($100K cap)
  • $150K hard cap all
No limitIneligible withdrawals added to annual income and taxed
  • Individual: $2.5K max deductible
  • Joint: $5K max deductible
No limitNo limit10%
  • Individual: $3K max deductible
  • Joint: $5K max deductible
No limitNo limit10%
  • Individual: $5K max deductible
  • Joint: $10K max deductible
  • Deductions phased out for AGI above $104K individuals and $149K joint filers
$50K over 10- yrs for individuals and married couples filing jointlyJan. 1, 202510%
  • Deposits taxed
  • Interest earnings not taxed
  • No annual limit
  • $50K lifetime cap single account
  • $150K lifetime cap all accounts
No limit5%

Which States are Considering First-Time Home Buyer Legislation?

Rising home prices have made it harder for Americans to save enough funds to make the leap from renting to owning, so the National Association of Realtors and other organizations have actively supported FHSA legislation across the nation to help encourage home buying.

Multiple states are now in the process of legislating programs for First-Time Home Buyer Savings Accounts. This list will be updated as new legislation is proposed or approved.

Legislation Proposed
AlabamaHB 248Signed, taking effect Jan. 1, 2019
LouisianaHB 383Introduced in House
MassachusettsH3919Introduced in House
MichiganSB 511/512Vetoed, returned to Senate
MissouriHCS HB 1796Signed, taking effect Jan. 1, 2019
NebraskaLB 15Postponed
New JerseyA4367 and S1144Introduced in House and Senate
New YorkS4058Signed, pending financial impact study
PennsylvaniaH.B. 1981Session expired; awaiting reintroduction 2019

There is growing support in the real estate industry for the federal government to establish tax-favorable savings accounts for home buyers nationally. However, no federal legislation is in place, nor does there currently exist any policies that allow FHSA contributions to be deducted from federal income tax. If your state doesn't yet offer FHSA accounts, take a look at some other popular programs for first-time home buyers.

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