First-time home buyer legislation takes effect.
Last March, we introduced BUILD readers to some legislation working its way through the Capitol. In May, after being passed in the Senate and the House, then-governor Terry Branstad signed what has come to be known as the First-time Home Buyer Law. It took effect January 1, 2018, after four-plus years in the works.
According to Ken Clark of VIA Realtors, former president of the Iowa Association of Realtors®, “That was a long time coming. We’d worked on multiple versions of the law before finally getting one that everyone was happy with.”
The bill passed overwhelmingly—49-1 in the Senate and 87-11 in the House—and is one of only a handful of similar bills around the country to date.
“It’s modeled after the 529 college savings legislation,” Clark says. “We hope it will encourage young Iowans to stay in the state, like the 529 program does with college.”
Only a handful of financial institutions are on board at the moment. Many more are in the process of setting up qualifying account options.
One of the first to get involved was Iowa Savings Bank. Realtor Scott Wendl, who was also actively involved in promoting the legislation, was the first Iowa resident to open a qualifying account. “I have three kids, ages 19, 16, and 14,” he says, “so I opened three accounts, with each as the beneficiary for one of the accounts.”
Wendl says one of the biggest barriers for first-time home buyers is the down payment, and this savings program is designed to address that. “The higher cost of living, student loan debt, not having any real savings—these all slow buyers down. And even if a young buyer can qualify for financing, having a bigger down payment can make it possible to get better points on their loan or avoid the monthly private mortgage insurance (PMI) fee, which means a lower payment every month.”
“This legislation does more for the health of the state and future home buyers than it does for us as Realtors. That was our motivation behind this project,” Clark says. Statistically, individuals who own their home rather than rent are more likely to have children who stay in school, more likely to have children who go to college, and more likely to maintain and improve their residence and neighborhood.
“Home ownership is best for the individual and for the economy of Iowa,” Clark says. “And Iowa has suffered from a brain drain for years, with young people moving out of state for work after college. If these savings accounts make buying a home in Iowa possible, all other factors being equal, young people are more likely to stay, and we want to encourage that.”
The response within Iowa has been extremely positive, Wendl says. “We’ve had a lot of local support since the bill was signed last spring. And we’ve had Realtors from other states reach out to learn more about it so they can get something similar started in their own states.”
Anyone can open a qualifying savings account with a participating lender, naming a specific beneficiary for the account, and there are no limits to annual contributions. However, the Iowa income tax deduction on contributions is limited to $4,000 for a married couple filing jointly or $2,000 for an individual. In addition, the same beneficiary can be named for multiple accounts, so parents, grandparents, and others can all open a savings account for the same child.
“You can open an account tomorrow and deposit $20,000,” says Clark. “But you can only deduct $4,000 of that on your taxes next year if you file jointly. And you can only claim first-time home buyer savings deductions for 10 years. So if you contribute for more than 10 years, you can’t continue to claim the contributions on your taxes.”
Funds accumulated in a qualifying savings account can be used tax-free by the beneficiary to purchase a home in Iowa. If a beneficiary is unable to purchase a home in Iowa or chooses not to do so, the funds can be withdrawn, but penalties will apply.
“I wouldn’t advise opening an account too early. Unlike the 529 college savings accounts, it’s probably not advisable to open a First-time Home Buyer account when a child is born because the tax deduction is only available 10 times. But by the time a child is in his or her teens, it’s a good idea to start thinking about it,” Clark says.
There may be situations where it’s too early to begin depositing. But it’s never too late. Realtors and lenders can provide advice for residents interested in opening a first-time home buyer savings account.