Bridging the Gap to Homeownership


 Tom Larson  |    May 13, 2019
Bridging the Gap to Homeownership

As part of the 2019-21 Wisconsin state budget, Gov. Evers has proposed a new tool to help first-time homebuyers save enough money for a down payment to purchase a home. The tool, called the First-time Homebuyer Savings Account (FHBSA), would provide state tax incentives to encourage prospective homebuyers to save money to purchase their first home. The program would be similar to Wisconsin’s Edvest program, which provides state tax incentives for families to save enough money for college. The FHBSA is one of the WRA’s top legislative priorities to help make housing more affordable and address the workforce housing shortage that is presenting challenges for employers statewide to attract and retain workers.

Background

Homeownership levels are down. Rising costs of housing and high student loan debt are impacting younger generations and their housing choices. Saving for a down payment and closing costs is very challenging in today’s economy. According to the 2016 State of the Nation’s Housing Report released by the Harvard Joint Center for Housing Studies, 12 percent of renter households had no savings in bank or retirement accounts. Among the other 88 percent of renter households, the median value of all financial assets was just $3,000. By comparison, a 5 percent down payment on the current median-priced home in Wisconsin* is $9,250.

By making it easier for Wisconsin families to purchase a home, the FHBSA would help attract and retain workers, create jobs and stimulate the economy. For every new home built or existing home sold, several new jobs would be created and thousands of dollars in state and local revenues would be generated. Moreover, for every home sold and new home built, a ripple effect on the economy would be created as homebuyers spend thousands more on consumer items such as furniture, appliances and lawn care equipment. 

What is the FHBSA? The FHBSA is a program that helps first-time homebuyers save enough money to purchase a home. The FHBSA is a savings account that may be opened at any financial institution that grows free from Wisconsin taxes. In other words, the interest and any capital gains earned on the account are not subject to state taxes. 

Who is eligible? The program is available to all ‚Äúfirst-time‚ÄĚ homebuyers, which means individuals who have (a) never owned a single-family residence either individually or jointly, or (b) previously owned a single-family residence but not during the past 36 months.¬†

What are the benefits of opening an FHBSA? To make it easier to save enough money necessary for a down payment to purchase a home, the FHBSA program has the following benefits: 

  1. Interest and capital gains on savings grow tax-free: All interest and capital gains on savings deposited into the FHBSA grows tax free, state tax only, until the money is withdrawn to purchase a home. This means that homebuyers who deposit money into an FHBSA will not have to pay a Wisconsin capital gains tax when withdrawing the money to purchase a home.
  2. Deduction for contributions: Prospective homebuyers who deposit money into an FHBSA will be allowed to deduct up to $5,000, or $10,000 if filing a joint income tax return, per year up to a maximum of $50,000 over the lifetime of the account. Anyone can contribute to the FHBSA, but only contributions made by the prospective homebuyer(s) are eligible for the deduction.
  3. Withdrawals are not taxed: An FHBSA provides a unique savings opportunity for homebuyers because both the contribution and the gains and interest earned on the contribution can be withdrawn tax-free. This makes the FHBSA different than both a traditional IRA and a Roth IRA, which both allow withdrawals for first-time home purchases. Withdrawals from both traditional IRAs and Roth IRAs for a first-time home purchase are limited to $10,000 in total. In addition, distributions from traditional IRAs are taxed as ordinary income, while withdrawals from Roth IRAs are taxed as income if they are withdrawn prior to being in the account for five years.

What are the other restrictions on FHBSAs? To ensure that the money is spent on a home purchase, once a prospective homebuyer opens an FHBSA, the prospective homebuyer must purchase a home within 10 years. If the homebuyer fails to purchase a home within 10 years after opening the FHBSA, the money deposited will be returned to the prospective homebuyer. Moreover, the FHBSA program places a $50,000 limit on the total amount of deductions that can be taken out over the lifetime of the account. 

Withdrawing any funds from an FHBSA for any unauthorized purpose would result in a 10 percent penalty plus any capital gains on the amounts withdrawn. 

Which other states have programs similar to the FHBSA program? At least nine states across the country have enacted FHBSA programs, recognizing the positive impact of homebuying on state and local economies. These states include Alabama, Colorado, Iowa, Minnesota, Mississippi, Missouri, Montana, Oregon and Virginia. 

Why is the FHBSA important for Wisconsin?

The FHBSA will help address Wisconsin’s workforce housing shortage: The FHBSA will help Wisconsin employers retain and attract workers by making it easier for the workers to find attractive and affordable housing options. With statewide housing inventory levels at historic lows, median home prices continuing to rise, and apartment rent increases outpacing wage growth, Wisconsin has a major workforce housing shortage problem. Unless this workforce housing problem is fixed, Wisconsin will be unable to keep and attract the skilled workers necessary for the statewide economy to thrive.

The FHBSA will increase home sales and new construction, making Wisconsin’s economy stronger: By helping people purchase more homes, the FHBSA will help create jobs, increase state and local revenues, and improve Wisconsin’s overall economy. Consider the following:

  • Real estate is the second largest industry sector in Wisconsin, accounting for 15.8 percent of the gross state product, 380,000 jobs, and producing approximately $18 billion in personal earnings in 2017.¬†
  • New residential construction alone employs 126,000 people and generates $5.6 billion in earnings, which account for 5.1 percent of the employment and 4.8 percent of the earnings in Wisconsin.¬†
  • Every new single-family home built creates three jobs and generates $89,000 in federal, state and local revenues.¬†
  • For every home sold in Wisconsin, $16,443 of income is generated from real estate-related industries ‚ÄĒ such as brokerage, mortgage lending, title insurance and appraisal ‚ÄĒ and one job is created for every two homes sold.
  • With every new home purchased, owners spend approximately $5,171 on average on furniture, appliances, lawn care equipment or services.¬†

The FHBSA will help improve the quality of life for Wisconsin families: By helping make homeownership more affordable, the FHBSA will help Wisconsin families educate their children, improve their living environment, and help stabilize and strengthen our communities. Studies show that homeownership has many social and community benefits, including:

  • Higher educational performance and better behavior of children.¬†
  • Lower community crime rates.¬†
  • Lessened welfare dependency among households.¬†
  • More household participation in civic affairs.¬†
  • Better household health.¬†

Over the next several months, the WRA will work closely with the Wisconsin legislature to keep the FHBSA in the state budget and hopefully get this new program enacted into law. 

Tom Larson is the Senior Vice President of Legal and Public Affairs for the WRA. 

*See the complete Wisconsin housing statistics report on page 7 for median home values and additional data. 

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