How a First Time Homebuyer Savings Account Can Help You Prepare to Buy a Home
For those who want to experience the American dream of owning their own home, there are many programs available to first-time homebuyers. One exciting new plan just for Iowans is The First Time Homebuyer Savings Account (FTHSA). It was signed into law May 9, 2017, and is a special savings account to assist Iowans in saving for their first home. Funds in the account are used for qualified expenses related to the purchase of a single-family home in Iowa, including the down payment and closing costs. Besides being a great idea to help build up extra money for this major purchase, it also has tax benefits.
The FTHSA is available to Iowa residents who:
- Have not owned a single-family or multi-family residence in a prior three-year period.
- Already own a home but are opening a FTHSA to assist a first-time homebuyer (a beneficiary) in making a qualified home purchase.
The three-year look back starts from the date on which a designated beneficiary was named on the FTHSA, or the date of a qualified home purchase using the FTHSA. An accountholder may have multiple accounts with different beneficiaries; however, the ownership of the new home must pass to the beneficiary within 60 days and must be occupied within 90 days of the purchase withdrawal.
The FTHSA is tax-preferred, providing for tax-deferred earnings and tax deductible contributions. There is no limit on the amount that can be contributed to the account; however, only $2,000 per year from Iowa adjusted gross income may be deducted in 2018. If the account is held jointly by a married couple filing a joint tax return, $4,000 may be deducted. The deductible amount will be adjusted each year for inflation. The lifetime benefit is 10 times the annual deductible limit, based on the limit in effect the year the taxpayer opened the account.
Because there are tax benefits, the taxpayer is required to complete an Iowa Department of Revenue (IDR) annual report form and include it when filing an Iowa tax return, along with a copy of form 1099. It’s always a good idea to consult a qualified tax preparer or the IRS for information about how activity in an FTHSA will impact taxes.
The account must be used for home costs before January 1 of the 10th calendar year during which the FTHSA was opened. Any funds left in the FTHSA for more than 10 years and withdrawals used for “non-qualified” reasons are considered taxable income and must be declared for income tax purposes, along with a 10% penalty. The penalty is waived in the event of death or if the withdrawal is due to a garnishment, levy or court order. Money withdrawn must be submitted on a withdrawal form to the IDR within 90 days prior to the withdrawal.
First Time Homebuyer Savings Account Requirement and Responsibility Checklist
- Iowa resident
- Meet 3-year requirement
- Use within 10 years
- Keep separate from other bank accounts
- Leave funds in account for 90 days prior to use
- Open at an Iowa financial institution
- Keep receipts and records to support the contributions/distributions
- Send completed form to IDR within 90 days of withdrawing funds
- File annual IDR report and include with tax return and any applicable 1099
- Submit Accountholder and Designated Beneficiary Form
- Review details at www.tax.iowa.gov or via PDF.
Shopping for that perfect, new home is an exciting time! For most, it’s by far the largest purchase ever made. If you’re thinking about making this major investment, it pays to take advantage of every benefit available to save money. Start saving early with a tax-preferred FTHSA and you’ll be in a better financial position with more options available to you when you find the right home!