VIRGINIA ADOPTS A FIRST TIME HOME BUYER’S SAVINGS PROGRAMBondBeebe
Glenn Bailey, CPA
Beginning in 2014, Virginia has adopted a program (FHSP) that allows a taxpayer to designate an account as a first time homebuyer savings account and subtract the income from that account from their VA taxable income. (Section 58.1-322) The account can only be used to pay the down payment or closing costs for a single family home (includes condos and co-ops, but not a multi-family building or land) in VA for someone who has never owned a home before. This can include a couple where one person was a prior homeowner but one was not. VA law allows you to designate an existing account, or set up a new one as an FHSP account.
No formal paperwork is required at the financial institution; it must only be disclosed on the taxpayer’s tax return along with the income subtraction. The initial account can contain a maximum of $50,000, and the account value can grow to a maximum of $150,000. Cash or marketable securities may be contributed to or in the account that is designated as the FHSP account. A single taxpayer may set up more than one FHSP account and the contribution and maximum value limitation apply separately to each account. Most any financial institution account will qualify under the law including banks, mutual funds, insurance companies or brokerage accounts.
The rules allow parents and grandparents to designate accounts for a child, grandchild or other persons. Beneficiaries can be changed at any time but must be a qualified first time home buyer. The only requirement is that the money be disbursed to a qualified first time homebuyer who purchases a home in VA. If the money is withdrawn for a disqualified use, all of the income that was subtracted on prior returns must be added to that year’s tax return along with a 5% penalty. The penalty does not apply when funds are withdrawn due to disability or death of the beneficiary, or death or bankruptcy of the account holder. Current gift tax rules will apply to money in the account when it is transferred to the beneficiary.
To designate a qualified first time homebuyer’s savings account you must include the following information on the initial tax return on which you designate the account and each subsequent return where you claim a subtraction:
- Name and address of the financial institution and the account number,
- Names of any other individuals with an ownership interest in the account;
- Type of principal (cash or marketable securities) contributed to the account;
- Amount of principal and earnings in the account on the last day of the tax year;
- The amount of any withdrawals from the account during the tax year; and
- The account beneficiary(ies).
As always, please feel free to contact us or reply to this piece should you have any questions or concerns.