Your First Home Can Be a Sweet Deal in Alabama
June 8, 2021
Making the financial commitment to buy a first home may seem daunting – especially to younger homebuyers learning how much they will need for a down payment on their dream home. But first-time Alabama homebuyers (and those who haven’t owned a home for at least 10 years) can take advantage of a sweet deal to save for what is likely the largest and wisest investment they can make – a new home. The First-Time Homebuyers Savings Account (FHSA) gives Alabama residents starting their journey toward homeownership a state tax break on the money they save and the interest it earns so they can invest in an Alabama home.
This opportunity for tax-free savings won’t last forever. The FHSA program began January 1, 2019, and eligible participants have until March 28, 2023, to open an account. So, if a home purchase is somewhere in your future, opening an FHSA may be a smart move now.
Here's how it works:
- To qualify, a single person or couple must be a first-time homebuyer or have not owned a home in the last 10 years.
- Individuals or couples may open a FHSA account at any participating Alabama bank, credit union, or financial institution.
- The deposits made to the account can reduce your gross income for state taxes and the interest earned is not taxed.
- Individuals may deduct from their gross income up to $5,000 per year for their FHSA and couples may deduct up to $10,000 per year.
- Only the amount eligible for tax deductions is limited – the amount deposited is not.
- To be tax-free, money deposited in the account can only be used for a down payment or to pay other expenses listed on a home purchase closing statement.
- Eligible single-family homes include a manufactured home, trailer, mobile home, condominium unit, or cooperative.
- To use the FHSA funds, simply withdraw them and spend them on eligible home buying expenses.
- Send to the Alabama Department of Revenue a detailed account of how funds were spent and a statement of any funds remaining in the FHSA account.
- Any funds not used for eligible home-purchase expenses must be reported as taxable income.
- The FHSA can remain open for five years. After that, any unspent funds will be counted toward the account holder’s taxable state income.
For example, a newly married couple with a goal of buying a home may face a 20 percent down payment to avoid the monthly expense of private mortgage insurance. The down payment on a $200,000 home would be $40,000. By contributing the maximum of $10,000 per year, the couple could achieve their down payment goal in four years and reduce their state tax bill each year as well.
A cautionary note: If you decide not to purchase a home after five years, you must withdraw the funds and include it in taxable income for the year it is withdrawn – and there will be a 10 percent penalty assessed. The penalty can be waived if the account holder died, became disabled, has exhausted unemployment benefits, or filed for bankruptcy.
The bottom line – and the bottom line is important – is the FHSA makes that first home purchase easier to achieve with tax savings to boot. It’s a sweet deal. Find more tips for first-time homebuyers here.