DES MOINES, Iowa–More states are adopting programs that create tax-favored accounts to help first-time homebuyers save for down payments on homes.
This year legislatures in Iowa, Minnesota and Mississippi passed such legislation, joining Colorado, Montana and Virginia with putting the programs in place.
The primary reason for the programs is no secret: as an Urban Institute study has found, 53% of renters say they cannot put aside enough money after rent to make the down payment.
Under the new plans passed by the six states, rules for the accounts vary by state but, in general, the measures allow first-time home buyers to save for a down payment — and related expenses like closing costs — in dedicated savings accounts, according to an analysis by The New York Times. In some states, savers get a tax break for their contributions by deducting the amount they’ve saved that year from their state income tax returns, the Times reported, adding that in other states, such as Minnesota, the contribution is not deductible. Instead, savers can subtract interest earned on the savings from their taxable income, a less generous approach since interest rates for basic savings accounts remain low.
Under the Mississippi plan, a tax benefit is provided for both contributions and gains on the money. Potential home buyers can set aside up to $5,000 each year for couples, and $2,500 for individuals.
Some states limit the deduction to buyers who have never owned a home, while others offer it to those who haven’t owned one in the past three years, a nod to potential buyers who may have lost a home in the Great Recession, according to the Times.
The National Association of Realtors, which backs such plans, said it is working with legislatures in Alabama, Louisiana, Michigan, Missouri, and Pennsylvania to set up similar programs.