Homeownership can be complicated, but we also think it’s one of the most rewarding ventures out there. In our series Ask an Edina Realty Lawyer, we are hoping to demystify some of the trickier aspects of buying, selling and owning a home.
In this edition, one of our lawyers discusses a new law that will assist first-time homebuyers as they save for down payment and closing costs for their first-ever home purchase.
Dear Edina Realty Legal,
I heard in the news that there is a new type of savings account designed just for first-time buyers. How does it differ from a traditional savings account and what are the advantages, if any, of opening one?
In a statewide poll, the Minnesota Association of REALTORS® (MNAR) found that 81 percent of Minnesotans believe that one of the biggest obstacles to buying their first home is coming up with funds for the down payment and transactional (closing) costs. In response, MNAR developed a method to assist first-time homebuyers in saving for and achieving their dream of homeownership.
In 2017, following an initial veto from the Governor, the Minnesota Legislature passed (and the Governor signed) a law creating the first-time homebuyer savings account.
The first-time homebuyer savings account is a mechanism that offers a tax incentive to people who are saving for a home purchase. The law also permits others (like parents and grandparents) to contribute to a loved one’s homebuying goals.
How the first-time homebuyer savings account works
- The prospective homebuyer (or someone on their behalf) opens an account with a bank, credit union or other similar institution.
- The account holder designates a first-time homebuyer as a beneficiary. The designation must occur by April 15 of the year following the year when the account was opened. This designation may be accomplished through state tax returns.
- An individual may contribute $14,000 annually to the account ($28,000 for married couples). The total amount an individual may contribute overall is $50,000; a couple may contribute up to $100,000.
- The interest that accrues on the account may be deducted from state income taxes. Essentially, this means that the interest is free of state tax, but not free of federal income tax.
- The funds must be used for a down payment or closing costs on a home purchase. If the funds are used for any other purpose, a tax penalty is imposed.
- People who have owned a home before can be considered first-time homebuyers under the law if more than three years have passed since they owned a home.
If you’re thinking about buying a home, consider taking advantage of the first-time homebuyer savings account. And remember there are other financing options available for first-time homebuyers, including down payment assistance programs and mortgage gift funds from family and friends.
By working with a trusted, reputable loan officer, you can ensure you are fully informed of all available tools to help you save for and fund your home purchase.
The Edina Realty Legal Department serves as in-house counsel for Edina Realty and does not represent private clients. This Insight is not intended to provide legal advice.