If you’re searching for an enduring gift for your loved ones, which will be treasured for a lifetime, during an especially challenging year, you can consider giving up to $15,000 in cash or assets to another person without having to worry about the federal gift tax. You’re allowed to make multiple $15,000 gifts to as many different people as you would like. For example, if you would like to give each of your three children $15,000 for a total of $45,000 in gifts, you can do so tax-free. For gifts of this size, one idea is to help the recipient buy their first home through the Colorado First-Time Homebuyer Savings Account (FHSA). This plan is similar to a 529 college savings accounts, but for homebuying. Any Coloradan can set up a savings account to be used towards the down payment and costs associated with closing for a first-time home.
For most first-time home buyers, the lack of a down payment is a key challenge to affording a home. The FHSA, which was approved by Colorado State Legislature (House Bill 16-1467) and became available in 2017, is a great way to solve that issue.
Moreover, in a housing market where interest rates are at an historic low, this is a great way to speed up a homebuyer’s ability to purchase their first home.
What is the benefit of setting up the FHSA?
Setting up this account allows a first-time homebuyer’s down payment to grow free of any Colorado taxes on gains in the account. This is a nice benefit, but the true benefit for a first-time buyer is creating an automatic system for monthly contributions to ensure that their savings grow. Not only could this be a unique and lasting gift for you to give during holidays, it could also be a wonderful alternative as a wedding gift. Instead of purchasing a happy couple a set of china that is rarely used, why not give them a memorable gift towards a down payment for their first home? When a baby arrives, proud parents, grandparents, or friends and relatives can even set up a FSHA account for the newborn child to have as an early start on saving for a home.
How much can be contributed to a FHSA?
First-time buyers can contribute a total of $50,000 in principal. The account can grow to a peak of $150,000 free of Colorado taxes. There is an annual contribution cap of $14,000 for a single person or $28,000 for a married couple filing jointly. Best of all, there is no time limit for how long the account can stay open.
What is allowable to be paid from the FHSA?
The down payment first and foremost. However, funds from this account can also be applied to anything included on the settlement statement such as closing costs, inspections, and lender fees.
To qualify for an FHSA, how is a first-time homebuyer defined?
Clearly, this is someone who has never owned a home. A home could be a single-family home, townhouse, condo, co-op, or mobile home, but it does not include land or commercial property. However, there are exceptions! If someone was married, owned a home, and is now divorced for three or more years, that person still qualifies. If that person was fortunate enough to inherit a home, that person can still qualify, but will likely not need to save for a down payment. Finally, another way to qualify is that person can buy a home with someone else who has owned a home, just as long as that person has not owned a home before.
How do you, or the first-time homebuyer, set up the FHSA?
Almost any kind of account you can set up at a financial institution can be in a FHSA. Examples are savings accounts, money market account, CDs, stocks, bonds, mutual funds, and even insurance.
If you are just getting started, you can open a new account, or you can designate one of the first-time homebuyer’s existing accounts as an FHSA. You or the first-time homebuyer will want to speak with their financial advisor or banking specialist to help them take the first step.
When the first-time buyer files state income taxes, there will be a form to send with the return. If their taxes are completed by a tax accountant or someone else, they will want to remind them of this important financial account and the proper paperwork.
What does the homebuyer do once the home is purchased and the funds are used?
Congratulations to the first-time homebuyer! There will be a form to complete and send to the State of Colorado showing that the funds were used toward “eligible” costs.
Does the homebuyer have to use a particular home loan program in conjunction with the FHSA?
No, the homebuyer can use any FHA, CHFA, VA, or conventional mortgage loan program. In fact, there are loan programs aimed at first-time buyers. For example, with an FHA home loan the homebuyer can get in with 3-½ percent down payment. Why not create a plan for monthly contributions to the FHSA based on saving up that 3-½ percent down payment by a certain time? Before the homebuyer knows it, they will have saved up enough to buy a home.
The first-time homebuyer should be sure to consult a financial planner, accountant, mortgage loan officer, and Realtor® to create a plan that is just right for their situation.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by
RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com,
call 303.441.5611 or visit boulderco.com.