- Since 2017, Minnesotans have been able to set up a First-time Homebuyer Savings Account as a way to help prepare for their down payment and closing costs.
- Parents, grandparents and other friends or family can also set up these accounts on behalf of a beneficiary, but they will have to name the beneficiary on their taxes.
- The tax benefits of these accounts offer a unique advantage to those who are saving towards homeownership.
In a statewide poll, the Minnesota Association of REALTORS® (MNAR) found that 81% of Minnesotans say the biggest obstacle 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.
Minnesota’s First-time Homebuyer Savings Account
In 2017, 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 home buying goals.
Setting up a first-time homebuyer savings account
To begin saving, the prospective homebuyer (or someone who is saving on their behalf) should open a savings account with a bank, credit union or similar institution. Under state law, an individual may contribute $14,000 annually to the account ($28,000 for married couples). Over time, the total amount an individual may contribute overall is $50,000, while a couple may contribute up to $100,000.
This is not quite a “set and forget” account. To stay in bounds legally, the savings account holder must designate a first-time homebuyer as a beneficiary by April 15 of the year after the account was opened. This designation may be accomplished through state tax returns.
Last, while the name of the program indicates it’s for those who are truly buying their first home, past homeowners are allowed to set up a savings account (or be named as a beneficiary to one) if more than three years have passed since they last owned a home.
The benefits of a first-time homebuyer savings account
One benefit to setting up a first-time homebuyer savings account is that you’ll receive a state tax deduction as you save up. The interest accrued on the account may be deducted from state income taxes, but not from your federal income taxes.
Of course, the primary benefit of using an account like this is that you’ll be dedicating funds directly to your future down payment or closing costs. For some would-be buyers, having a separate account devoted to their goal of homeownership — and watching that account grow — can be highly motivating.
Note: If you designate the account as a First-time Homebuyer Savings Account on your taxes, then 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, you will incur a tax penalty.
Getting started with your homebuyer savings account
If you’re thinking about buying a home, consider taking advantage of the first-time homebuyer savings account. You can open an account at any bank, credit union or similar institution, or speak with Edina Realty or your REALTOR® for explicit guidance on getting started.
Remember, too, there are other financing options available for first-time homebuyers, including down payment assistance programs and mortgage gift funds from family and friends.