For 26% of first-time home buyers, saving for a down payment on a home is the most challenging step in the home buying process, according to the 2022 Profile of Home Buyers and Sellers report by the National Association of Realtors® (NAR). Overall, it is very difficult for first-time buyers in this housing market. Of all home buyers, only 26% were first-time buyers in 2022, down from last year’s 34%. Since NAR’s data collection started, this is the lowest share of first-time buyers. Moreover, the typical first-time buyer is now 36 years old, the highest age ever.
Jessica Lautz, vice president of demographics and behavioral insights at NAR, says, “It’s not surprising that the share of first-time buyers shrank to the lowest level ever recorded given the housing market’s combination of historically low inventory, persistently high home prices, and rapidly escalating interest rates.”
In an appreciating market such as Boulder Valley, purchasing a first home becomes harder as time goes on because home prices continue to rise. The saying goes, “You can’t out save the market.”
NAR also states that 22% 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, which is how to gift money to help a home buyer purchase their first home.
In 2022, someone can gift $16,000 per person without any tax considerations. For a married couple giving to a child, that adds up to $32,000. In addition to a first-time buyer’s savings, that could be enough to make a home purchase possible. However, in many cases it isn’t. If a couple decides to gift more than $32,000, they will need to file a gift tax return. Before making a gift, check with your tax advisor to see what works best in your situation.
Another idea is the First-Time Homebuyer Savings Account (FHSA). This type of account was approved by Colorado State Legislature (House Bill 16-1467) and became available in 2017. Any Coloradoan can set up this account to be used towards a down payment and anything included on the settlement statement such as closing costs, inspections, and lender fees. Setting up an FHSA allows the down payment to grow free of Colorado taxes on any gains in the account. Up to $50,000 in principle can be placed in the account and it can grow to up to $150,000 tax-free.
The tax benefit isn’t all that remarkable in and of itself, but it does help. Perhaps even more important is that it creates an automatic system for monthly contributions to ensure that the savings grow. In addition to any gifted funds they might receive, first-time home buyers can make their own contributions to the FHSA.
There will be an annual contribution cap of $16,000 ($32,000 if filing jointly). 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 their newborn grandbaby’s future home.
To qualify for a FHSA you need to be a first-time homebuyer, but there are exceptions. If you were married and owned a home with your spouse but you have been divorced for three years, you still qualify. You can buy a home with someone that has owned a home, just as long as you haven’t owned a home before.
It is easy to get started! Almost any kind of account you can have set up in a financial institution can be in a FHSA Account. Examples are savings accounts, money market accounts, CDs, stocks, bonds, mutual funds and even insurance. If you are just getting started you can open up 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 an FHSA to save up for a specific down payment by a specific date. Be sure to consult a financial planner, accountant, mortgage loan officer, and Realtor® to create a plan that’s just right for you and the first-time homebuyer.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder since 1982. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or visit BoulderPropertyNetwork.com.