Beginning January 1, 2019, Oregon became the 6th state in the nation to offer first-time home buyers a tax-free savings vehicle to help families purchase their own single-family residence. Married filing jointly couples may be allowed to subtract up to $10,000 from Oregon taxable income annually for a 10 year period of time, with a maximum tax benefit of $50,000. For those not filing jointly, the deduction maximum is $5,000.

Though the tax subtractions is capped at $5,000 a person per year, the accounts themselves do not have a limit to the maximum amount of cash contributions per year. Contributions to these accounts do not have to be made by the account owner.  Parents and grandparents, as an example, can use these accounts as a tool for future generations’ success and welfare or as a jump-start for their down payment nest egg (but keep in mind any large gifts may need to be reported for federal gift tax purposes).

The law defines a first-time home buyer as an individual who is “a resident of [Oregon] and has not owned or purchased, either individually or jointly, a single-family residence during a period of three years prior to the date of the purchase of a single-family residence.” This program was designed to help low to middle-income families make the jump from renting to homeownership.

Here are a few details you may want to consider before creating your first-time home buyer savings account.

There are income phase-out limitations. If your federal adjusted gross income is more than $149,000 for a married filing joint couple ($104,000 for all other filers), then your Oregon subtraction will be reduced in $2,000 increments. Once a married filing jointly couple hits a federal adjusted gross income of $187,000 (or $131,000 for all other filers), the subtraction is completely phased out.

You are on a ten-year clock. The program is not intended to be a lifetime savings account. If you are not truly ready to consider homeownership in the next decade, this program may not be the right fit for you. After 10 years, any amount subtracted from income must be added back into income if not used for qualified expenses.

You are investing in a cash savings account that may have limited growth potential. The law doesn’t dictate a savings rate that banks are required to provide. It is reasonable to expect banks to offer comparable savings rates to other products, but don’t be expecting to ride the highs (and lows) of the stock market.

Any funds withdrawn to pay for non-eligible costs will be subject to income tax plus a 5% penalty. If you end up saving beyond your down payment and want to buy a new couch, think again! That new couch may cost about an extra 14% of retail value ( about 9.9% Oregon income tax + 5% penalty). You will not incur a penalty if you choose to change banking institutions and roll the account over to a different bank.

Saving for your first down payment is important and challenging. Not sure if you’re ready? Reach out to your Aldrich Advisor today and let us help you achieve your goals.