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Ask Adam: Va. First-Time Homebuyer Savings Plan

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This regularly-scheduled sponsored Q&A column is written by Adam Gallegos of Arlington-based real estate firm Arbour Realty, voted one of Arlington Magazine’s Best Realtors of 2013 & 2014. Please submit your questions via email.

Q. I heard about a new first time homebuyer savings plan being introduced in Virginia. Do you have any information you can share with me about this program?

A. I’m glad you brought this up as it is a brand new program I am excited about. I have to be careful when it comes to anything that may be considered tax advice, so I am simply going to share the general information provided by the Virginia Association of Realtors (VAR). You can download a PDF document from for additional details.

The First-Time Homebuyer Savings Plan (FHSP) allows first time home buyers in Virginia to invest up to $50,000 for the future purchase of a home. Earnings on that money will be exempt from Virginia state taxes. The money can be invested in almost any account you have with a financial institution including savings account, life insurance plan, stocks, bonds, CD, money market or mutual funds. $50,000 is the maximum that can be invested in principle, but the money can grow in value up to $150,000.

From what I understand, these funds can only be used towards the closing costs associated with a home purchase. In most cases, the closing costs range from two-percent to three-percent of the purchase price so the above maximums should be more than enough for most homebuyers.

The money does not have to be for your own purchase. It can gifted to a relative or close friend. This may be especially valuable for a young child that you are putting money away for as your investment will have lots of time to increase in value.

When filing taxes, you’ll just include a 1099 from the financial institution you are investing your money with and a simple one page FHSP document.

I found the following two examples from the VAR website helpful:

Funding for a child

Phillip and Leigh put $10,000 into a mutual fund that they will use to help their son buy his first home. The money grows over the years. When their son is 26, he decides to buy a home. They sell the shares in the fund — now worth $18,500 — and give it to their son to help with his down payment.

Normally they would pay state tax on the $8,500 in earnings, but they file a FHSP form with their Virginia taxes and don’t have to pay a cent in state taxes.

Changing your mind

Emma decides to start putting money away for a first home when she graduates college. She opens a high-yield savings account with a few hundred dollars and adds to it when she can over the next 12 years. The account grows.

Each year, Emma files an FHSP form with the Department of Taxation so she doesn’t have to pay Virginia tax on the interest she’s earned.

Then Emma marries Sam, and Sam already owns a house. She won’t need the money after all. They decide to use it for a vacation instead.

Because Emma used the money for a “non-eligible” purpose — the vacation — Emma must now pay the back taxes on the 12 years of earnings on the account, as well as a five percent penalty on the amount of the earnings over that 12-year period.

Disclaimer: I am not a tax professional and I highly recommend speaking to one before making any decisions that pertain to the FHSP.

The views and opinions expressed in the column are those of the author and do not necessarily reflect the views of ARLnow.com.

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