‘Tis the season for holiday giving and in 2019, you can give up to $15,000 in cash or assets to another person without having to worry about the federal gift tax. In fact, you’re allowed to make multiple $15,000 gifts to as many different people that you would like. As an 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 home buying. 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 the foremost 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.
What is the benefit of setting up a FHSA?
Setting up this account allows your down payment to grow free of any Colorado taxes on gains in the account. This is a nice benefit, but the true benefit for the first-time buyer is creating an automatic system for monthly contributions to ensure that savings grow. Not only could this be a unique and enduring gift for the holidays, it can also be a wonderful alternative for a wedding gift. Instead of purchasing the 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 an early start on saving for a home.
How much can be put in?
You 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 can be paid out?
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.
How does a first-time homebuyer qualify?
Clearly, it is someone who has never owned a home, BUT there are exceptions! If you were married, owned a home, and are now divorced for three or more years, you still qualify. If you were fortunate enough to inherit a home, you can still qualify, but you likely will not need to save for a down payment in that case. Finally, another way to qualify is that you can buy a home with someone who has owned a home, just as long as you have not owned a home before.
How do you, or someone wishing to help you, set up?
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 an existing account to become an FHSA. Speak to your financial advisor or banking specialist to help you take that first step.
When you file your state income taxes there will be a form to send with the return. If your taxes are completed by a tax accountant or someone else, remind them of this important financial account and the proper paperwork.
What do I do when I have bought a house and used the funds?
Congratulations on buying that home! There will be a form to fill out that you send to the State of Colorado showing that the funds were used toward “eligible” costs.
Do I have to use a particular loan program in conjunction with my FHSA?
You can use any FHA, CHFA, VA, or conventional program. In fact, there are loan programs geared toward the first-time buyer. For example, with an FHA home loan you can get in with 3-½ percent down payment. Why not create a plan for monthly contributions to your FHSA based on saving up that 3-½ percent down payment by a certain time? Before you know it, you’ve saved up enough to buy a home.
Be sure to consult your financial planner, accountant, mortgage loan officer and Realtor to create a plan that is just right for your 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.