Saving for a down payment on a home is the most difficult step in the process of buying a home for 25% of first time buyers, according to the National Association of REALTORS (NAR) 2017 Profile of Home Buyers and Sellers. Of those buyers, 55% said student loan debt delayed them in saving for a home. Now couple those issues with the high price of real estate in the Boulder area, and it makes it very difficult for first-time buyers to get started. In fact, according to the same profile from NAR, the typical first-time buyer might delay a purchase for three years to save for a down payment. In an appreciating market such as in the Boulder area, purchasing the first home gets harder as time goes on.
NAR also says that 25% of first-time buyers depended on a gift from a relative or friend to help with the down payment. This brings us today’s topic: gifting money to first-time buyers to help purchase their first home.
In 2017, you can gift $14,000 per person without any tax considerations. For a married couple giving to a child, that adds up to $28,000. In addition to a first-time buyer’s savings, that could be enough to make the purchase happen. However, in many cases it isn’t. If a couple decides to gift more than the $28,000, any additional amount will be applied to the estate tax credit of $5.49 million. Before gifting, you should check with your tax advisor to see what works best in your situation.
Another idea, which became available in 2017 for Colorado residents, is the First-Time Homebuyer Savings Account (FHSA). The ability to establish this account came from the Colorado Legislature as House Bill 16-1467. Any Coloradoan can set up an account to be used towards down payment and costs associated with the closing. Setting up this account allows the down payment to grow free of any Colorado taxes on any gains in the account. Up to $50,000 can be placed in the account and it can grow to up to $150,000 without taxation.
The “tax benefit” isn’t all that significant in and of itself, but it does help. Perhaps even more important is that it creates the structure of saving for the down payment for that first-time buyer. In addition to any gift funds they might receive, they can make their own contributions to it and watch their down payment funds grow.
The annual contributions are limited to the same gift amounts as above: the $14,000 and the $28,000, respectively. There is no time limit on how long the account can be open. That means a grandparent can even open an account now to start saving for a grand baby’s future home.
To qualify for a FHSA you need to be a first-time buyer, but there are exceptions. If you were married, now divorced for three years, you still qualify. You can buy a home with someone that has owned a home, just as long as you have not owned a home before.
It is easy to get started! Almost any kind of account you can set up in 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 your FHSA.
In this season of giving, why not get someone started with a gift and then help create a plan for monthly contributions to a FHSA to save up for a specific down payment by a specific date?
Be sure to consult your financial planner, accountant, mortgage loan officer, and REALTOR to create a plan that is just right for your situation!
Here are two RE/MAX of Boulder videos with more information:
Gifting money for down payment with Duane Duggan and attorney Gina Weinberger of Weinberger Law LLC
Answers to questions about Colorado FHSA with Duane Duggan and Loan Officer Jessica Shanahan with Premier Lending.
Or download our podcasts on these topics and dozens more real estate, financial, and mortgage topics on iTunes and other major podcast providers at http://apple.co/2yTWvk2
For National Association of REALTORS 2017 Profile of Home Buyers and Sellers, visit: https://www.nar.realtor/research-and-statistics/research-reports/profile-of-home-buyers-and-sellers-in-subregions
About Duane Duggan: Duane Duggan 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. Also see his video podcasts about real estate topics on RE/MAX of Boulder’s YouTube channel.
For questions, email Duane at DuaneDuggan@BoulderCo.com or call 303-441-5611