First-time homebuyers can now create a tax-free savings account to be used towards the purchase of their first home. This new resource in Alabama is exclusively for first-time buyers or those reentering the housing market if you haven’t owned a home in the last 10 years. 
Individuals or couples can open one of these tax-free savings accounts at any local bank, credit union or other financial institution in Alabama. The principal deposits and earnings will be deductible on your state income taxes. Savings from the account can be used to pay for the down payment and/or closing costs for the purchase of a single-family dwelling.

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FREQUENTLY ASKED QUESTIONS:

What is it?

A savings account for qualifying homebuyers that offers tax savings on the deposits and interest earned.  

Who is it for?

First-time or second-chance homebuyers (i.e., any Alabamian who has not owned or purchased, either individually or jointly, a single-family residence during a period of 10 years prior to the date of the purchase of a single-family residence).  

Where can I create an account?

Any bank, savings institution, industrial loan association, credit union, or other similar entity authorized to do business and accept deposits in Alabama.

When can I create one?

Today. The First-time and Second-Chance Homebuyer Act was effective January 1, 2019.  An individual must open a first-time/second-chance homebuyer savings account between January 1, 2019 and March 28, 2023.

Why would I want to create one?

If you are a qualifying homebuyer, the deposits and interest earned will help you make the purchase. Deposits reduce your income from state income taxes and interest earned is tax free.

How does it work?

Individuals can deduct up to $5,000 per year from their state gross income for deposits into a First-time/Second-Chance Homebuyer Savings Account. Couples can deduct up to $10,000 per year. It’s a dollar-for-dollar deduction up to the threshold (i.e. an account holder who deposits $10 into a savings account can deduct $10 from his or her state gross income; joint account holders who deposit $10,500 can deduct $10,000).

How long can my account remain open?

Five years, after which time any account funds not spent on qualifying costs will be included in the account holder’s taxable income.

Is there a limit on how much money I can deposit?

No. Deposits are not limited. There are, however, limitations on income tax deductions from the deposits. Income tax deductions for individuals are limited to $5,000 per year for a total of $25,000 over five years, and joint savings account holders who file taxes jointly can deduct up to $10,000 per year for a total of $50,000 over five years. For example, you can deposit $100,000 in the account over the five-year period but can only deduct $25,000 or $50,000 depending on your tax filing status.

Can I put more than $5,000 into my First-time/Second-Chance Homebuyer Savings Account one year?

Yes. While deposits are not limited, the income tax deductions are.

What can deposits and interest be used for?

The down payment and disbursements listed on the settlement statement for the purchase of a home in Alabama.

What can deposits and interest be used for?

The down payment and disbursements listed on the settlement statement for the purchase of a home in Alabama.

What homes are eligible?

Single-family residences in Alabama, including a manufactured home, trailer, mobile home, condominium unit, or cooperative.

Can I deposit First-Time/Second-Chance Homebuyer Savings into an existing account that contains funds for a different purpose?

No. A First-time/Second-Chance Homebuyer Savings Account must be a new, separate account specifically designated as First-Time/Second-Chance Homebuyer Savings Account to be used solely for the purchase of your first home.

Do I pay Alabama taxes when I pull money out of my First-Time/Second-chance Homebuyer Savings Account?

Not if you are a first-time or second-chance homebuyer and use the money toward the down payment and/or settlement costs of a home purchase in Alabama.

What if I use the money for something other than a first-time or second-chance home purchase?

Unless the full amount withdrawn is deposited into another First-Time/Second-Chance Homebuyer Savings Account within 60 days of withdrawal, the entire account balance, including interest, will be taxed, and the amount withdrawn assessed a 10 percent penalty. The penalty will be waived if the withdrawal is due to:
1)    The account holder dying
2)    The account holder becoming disabled
3)    The account holder exhausting unemployment compensation benefits
4)    The account holder’s bankruptcy filing

Can I receive a deduction for deposits into another person’s First-Time/Second-Chance Homebuyer Savings Account?

No. While non-account holders can deposit funds into another’s savings account, income tax deductions are limited to the account holder.

What if the account holder dies?

If no other account holder is on the account, the account funds will be dispersed by the financial institution either under the terms of the account contract or as directed by law. The 10 percent penalty will be waived, but the accounts may be subject to tax as gross income. If another account holder is on the account, the living account holder may leave the account open, subject to the five-year limitation.

How do I take the deduction with the Alabama Department of Revenue?

On your tax return, as an adjustment to income, deduct the deposits into your First-Time/Second-Chance Homebuyer Savings Account made during the tax year for which you are filing a return (Alabama form 40, Page 2, Part II). Submit to the Alabama Department of Revenue the Form 1099 that you receive from the financial institution for the account, and, if not specified on the Form 1099, a list of transactions for the account during the tax year (monthly or quarterly statements for the year will provide the transaction detail required). Failure to provide sufficient information to the Alabama Department of Revenue may cause the deduction to be denied and the interest earned to be taxed and a penalty to be incurred. 

What if I move out of Alabama or purchase a house outside of Alabama?

Accounts may only be opened by Alabama residents and the funds must be used to purchase a home in Alabama. If the funds are not used to purchase a home in Alabama, any amounts previously deducted and the interest not previously taxed must be included in the taxpayer’s income. Also, deductions from deposits only reduce income on your Alabama tax return, not income on tax returns for other states or the federal government.

How do I use the savings account funds to purchase a residence?

Withdraw the funds from the account and use the funds to pay for eligible costs.

What do I do when I purchase a home using the savings account funds?

Upon withdrawal of funds from the savings account to pay for eligible costs, send the Alabama Department of Revenue:

  1. a detailed account of the eligible costs toward which the account funds were applied (the closing statement)

  2. a statement of the funds remaining in the account, if any (account statement)

I deposited $5,000 in a savings account and only spent $4,500 on closing costs and the down-payment. What do I do?

Withdraw the $500 from the account. When filling out your income tax return, you will do one of two things: (A) If the $5,000 was deducted from your income in a previous year, you will need to add the $500 not used to purchase the home to your income; or (B) If you have not deducted the $5,000 from your income, you will only deduct from your income the $4,500 or amount up to $4,500 total not already deducted.

What are the rules for rolling over an FHSA into another FHSA?

Unless the full amount withdrawn is deposited into another First-Time/Second-Chance Homebuyer Savings Account within 60 days of withdrawal, the entire account balance, including interest, will be taxed, and the amount withdrawn assessed a 10 percent penalty.  Rolling the FHSA into another FHSA does not extend the five-year requirement to use the funds to purchase a home in Alabama.

When my current FHSA expires, can I roll it into a new FHSA without penalty?

No, rolling over funds from one FHSA to another does not extend the time requirement to utilize the funds for purchasing a home.

Can I open an FHSA account if I lost my home to foreclosure 8 years ago and will purchase a home in 2 to 5 years?

Yes. You can open the account but cannot purchase the home until 10 years after you have previously owned a home. 

My FHSA expired after 5 years and I was not able to purchase a home. What happens to the money in the account?

The entire account balance including interest should be withdrawn and will be included in the taxable income in the year it is withdrawn. A 10 percent penalty will be assessed. The penalty will be waived if the withdrawal is due to:

  1. The account holder dying

  2. The account holder becoming disabled

  3. The account holder exhausting unemployment compensation benefits

  4. The account holder’s bankruptcy filing

Do I pay federal taxes on the money?

Yes. The deductions for deposits only apply to your income for state tax purposes. Interest earned is still subject to any applicable federal taxes.

 
 Federal TaxesAlabama Taxes
Deposits into First-Time/Second
Change Savings Account
Not DeductableDeductible up to $5,000 for individuals ($25,000 total deduction) & 10,000 for couples ($50,000 total deductions)
Interest Earned in AccountTaxableNot taxable
Withdrawals for Eligible ExpensesNo effectNot taxable
Withdrawals for Ineligible ExpensesNo effectTaxable and possible penalty


Disclaimer: This FAQ is meant to provide general information only. The FAQ is not intended and should not be construed to be legal or tax advice. Questions should be directed to a qualified legal or tax professional.

Participating Banks

Although all Alabama financial institutions are eligible to offer a First-Time Homebuyer Savings Account, here is a confirmed list of participating banks.

Alabama One Credit Union - Tuscaloosa Branch
AuburnBank - Auburn Branch
BancorpSouth - Offered at all branches
First Federal Bank - Tuscaloosa Branch
Regions - Birmingham Branches
Synovus - Offered at all branches
Trustmark National Bank - Offered at all branches