Notice First Time Home Buyer Savings Account Program

May 19, 2022

On February 9, 2022, Governor Gretchen Whitmer signed into law Public Acts 5 and 6 of 2022 (PAs 5 and 6), creating the Michigan First-Time Home Buyer Savings Program. The program allows an individual to open a first-time home buyer savings account with any financial institution authorized to do business in Michigan, and allows for favorable state tax treatment for qualified contributions and withdrawals from these accounts. This notice describes the program and the tax treatment of contributions to and withdrawals from these types of accounts.

Under PA 6, beginning January 1, 2022, through December 31, 2026, an individual may establish a first-time home buyer savings account for the purpose of paying or reimbursing for eligible costs of purchasing a single-family residence for use as a principal residence by a qualified beneficiary. Eligible costs include the down payment and other allowable closing costs as shown on a settlement statement or an executed sales agreement for the purchase of a traditional or manufactured home. The qualified beneficiary may be the account holder themself or another Michigan resident so long as the beneficiary has not owned or purchased a single-family residence during the three years prior to the date of purchase.

The maximum account balance for an account is $50,000. An individual may establish multiple first-time home buyer savings accounts but cannot designate the same qualified beneficiary on more than one account. An individual may, however, be designated as the qualified beneficiary on more than one first-time home buyer savings account.

PA 5 amended the Michigan Income Tax Act to allow a deduction for contributions made in tax years 2022 through 2026 to a first-time home buyer savings account less qualified withdrawals made from the same account up to a total deduction of $5,000 on a single return or $10,000 for a jointly filed return, to the extent not deducted in determining adjusted gross income (AGI). Interest earned on contributions to the account is also deductible for tax years 2022 and after to the extent not deducted in determining AGI. Finally, for tax years 2022 and after, distributions that are qualified withdrawals, made to pay or reimburse for eligible costs, are deductible to the extent they are included in AGI.  Qualified withdrawals may not be made until one year after the first-time home buyer savings account is opened and designated as a first-time home buyer savings account.  To receive this tax treatment, an account holder must designate the account as a first-time home buyer savings account on his or her income tax return and may be required to submit supporting documents such as account statements and Form 1099-INT with the account holder’s income tax return.

To open a first-time home buyer savings account, an account holder merely needs to create a new account with a financial institution authorized to do business in Michigan.  The financial institution is not responsible for designating an account as a first-time home buyer savings account, designating the qualified beneficiaries, tracking the use of money withdrawn, allocating funds among joint account holders or multiple qualified beneficiaries, or reporting any information to the department that is not otherwise required by law. The acknowledgement of the account as a first-time home buyer savings account is made upon the designation as such with the filing of the account holder’s income tax return.

Generally, account funds cannot be used to pay expenses of administering the account, except that a service fee may be deducted from the account by a financial institution in which the account is held.

First-time home buyer savings accounts may only be used for first-time home buyer program purposes. Any use of the account funds for any purpose other than for eligible costs by a qualified beneficiary for the purchase of a single-family residence will subject the account holder to penalties and loss of the tax benefits described above. 

The following questions and answers provide additional guidance on the Michigan First-Time Home Buyer Savings Program.

Q: What is the Michigan First-Time Home Buyer Savings Program?

A: The Michigan First-Time Home Buyer Savings Program was created to assist first-time home buyers with the purchase of their Michigan principal residence. Accounts created in connection with the First-Time Home Buyer Savings Program may be used for the payment or reimbursement of eligible costs for the purchase of a single-family residence in Michigan by a qualified beneficiary designated on the account.

Q: How can I open a first-time home buyer savings account?

A: An account holder may open a savings, checking, or money market account at a financial institution that the holder will later designate as a first-time home buyer account when filing a Michigan income tax return.  The financial institution has no role or responsibility in designating the account as a first-time home buyer account. Rather, that designation occurs when the account holder designates the account when filing their tax return. An account designated for this purpose cannot have funds comingled with funds in other accounts nor can funds in this account be used for purposes other than the payment or reimbursement of eligible costs for the purchase of a single-family residence in Michigan by the qualified beneficiary.

Q: Who is a first-time home buyer?

A: A first-time home buyer is a Michigan resident who has not owned or purchased (individually or jointly) a single-family residence during a period of 3 years before the date of the purchase of a Michigan single-family residence.

Q: Who is an account holder?

A: An account holder is an individual who establishes, either individually or jointly with another individual with whom they file joint tax returns, an account with a financial institution for which the account holder claims a first-time home buyer savings account status on his or her income tax return.

Q: Who is a qualified beneficiary?

A: A qualified beneficiary is a first-time home buyer who is designated as the beneficiary of a first-time home buyer savings account by the account holder. The account holder may be the qualified beneficiary of the account.

Q: Which financial institutions may be used to create a first-time home buyer savings account?

A: A first-time home buyer savings account can be established at any bank, trust company, savings institution, industrial loan association, consumer finance company, credit union, benefit association, insurance company, safe deposit company, money market mutual fund, broker, or other similar entity that is authorized to do business in Michigan.

Q: May an individual be the account holder of more than one first-time home buyer savings account?

A: Yes, however, each account must have a different qualified beneficiary.  

Q: May a person be the qualified beneficiary on more than one first-time home buyer savings account?

A: Yes, an individual may be designated as the qualified beneficiary on more than one first-time home buyer savings account.

Q: What expenses are “eligible costs” that may be paid or reimbursed from a First-Time Home Buyer Savings Account?

A: “Eligible costs” are the down payment and “allowable closing costs” for a Michigan single-family residence that will be the qualified beneficiary’s principal residence.

Q: What expenses qualify as “allowable closing costs?”

A: Allowable closing costs are those disbursements listed on a settlement statement for the purchase of a Michigan single-family residence by a qualified beneficiary.

Q: What is a settlement statement?

A: A settlement statement is the statement of receipts and disbursements for the purchase of a Michigan single-family residence that is a qualified beneficiary’s principal residence. An executed sales agreement for the purchase of a manufactured home being conveyed as personal property will also qualify as a settlement statement.

Q: What documentation should I submit if I am claiming a deduction, but I am not the account holder?

A: A taxpayer who is claiming a deduction and who is not the account holder for the account(s) must provide:

• Account statements to show the contribution(s) they made
• Account statements showing the qualified withdrawal(s), if any

Q: What documentation should I submit if I am the account holder?

A: The  account holder must submit the following  documentation for the first-time home buyer savings account with the their income tax return:

• Account statements that show the contributions made during the tax year and the taxable interest or earnings on the account in the tax year for which the deduction is claimed
• Upon withdrawal of funds from the account, a copy of the real estate settlement statement that shows the withdrawal was used for eligible costs
• The Form 1099 issued by the financial institution for the account for the tax year in which the deduction is claimed.

Q: What if more than one person contributed to an account that had a qualified withdrawal during the tax year?

A: The contribution must be prorated.

The proration is equal to the actual contribution less the share of the qualified withdrawal that is equal to the qualified withdrawal multiplied by a fraction, the numerator of which is the taxpayer’s contributions to the account and denominator of which is the total of all contributions made to the account during the year. The net contribution amount cannot be less than $0.

Example: Sarah, the account holder, contributed $6,000 to a first-time home buyer account. Another taxpayer also contributed $2,000 during the tax year for a total annual contribution to the account of $8,000. A qualified withdrawal of $5,000 for an earnest money payment also occurred. To arrive at her net contribution, Sarah must determine what portion of the total withdrawal she must net against her contribution. The net contribution is calculated as follows:

$6,000 (Sarah’s contribution) / $8,000 (total contributions) = 75%

75% (0.75) x $5,000 (withdrawal) = $3,750 (Sarah’s prorated portion of the withdrawal)

$6,000 - $3,750 = $2,250 (Sarah’s net contribution)

$2,250 should be entered in the contribution box for this account.

Q: What is a Michigan single-family residence?

A: A single-family residence is a home or dwelling located in Michigan that is owned and occupied by a qualified beneficiary as that individual’s principal residence.

Q: Does a manufactured home qualify as a single-family residence?

A: Yes, a manufactured home, trailer, mobile home, condominium unit, or cooperative qualifies as a single-family residence for purposes of the Michigan First-Time Home Buyer Savings Program.

Q: What is a principal residence?

A: A principal residence is the one place where the qualified beneficiary as the owner of the property has their true, fixed, and permanent home to which, whenever the person is absent, they intend to return. 

Q: Are contributions to a first-time home buyer account tax deductible? 

A: Yes, contributions made by a taxpayer to first-time home buyer account during the tax year may qualify for a deduction from Michigan taxable income to the extent they were not deducted in determining adjusted gross income (AGI). However, the contributions must be netted against qualified withdrawals made in the same year for a total deduction up to $5,000 on a single or married filing separate return or $10,000 on a jointly filed return.

Q: Is interest earned on a first-time home buyer savings account deductible?

A: Yes, to the extent not deducted in determining AGI, interest earned in the tax year on an account is deductible. The account holder must submit with their MI-1040 income tax return account statements showing contributions and withdrawals made during that tax year, taxable interest or earnings on the account, and the Form 1099 issued by the financial institution for the account.

Q: For what tax years may deductions be taken for contributions to first-time home buyer savings accounts?

A: Deductions for contributions by the account holder to first-time home buyer savings accounts may be taken for tax years that begin on or after January 1, 2022, and through December 31, 2026.   

Q: Is there an income tax form that must be filed for a first-time home buyer savings account?

A:  Yes, a Michigan First-Time Home Buyer Savings Account income tax form must be completed and filed with the taxpayer’s MI-1040. Form 5792, Michigan First-Time Home Buyer Savings Program, requires the account holder’s name, the name of the qualified beneficiary, the name of the financial institution and account number, the beginning and year-end balance of the account, and the amount of the deduction claimed for that tax year.

Q: What records should be retained?

A: Claimants of the first-time home buyer deduction should retain records that document the establishment of the account and all activities and transactions relating to the account, including account statements for all contributions into and withdrawals from the account, a detailed list describing the purpose of transactions for the account, payments made to or on behalf of the qualified beneficiary of the account, and any other records and papers related to the account.

Q: Does a financial institution have any responsibilities connected to first-time home buyer savings accounts?

A: No,  the financial institution is not responsible or liable for any of the following: (i) designating an account as a first-time home buyer savings account, (ii) designating the qualified beneficiaries, (iii) tracking the use of money withdrawn, (iv) allocating funds among joint account holders or multiple qualified beneficiaries, (v) determining or ensuring that the account meets the requirements to be a first-time home buyer savings account, (vi) reporting or remitting taxes or penalties related to the use of the first-time home buyer savings account, or (vii) reporting any information to the Department of Treasury that is not otherwise required by law.

Q: Can I withdraw funds from one first-time home buyer savings account and deposit them into another account?

A: Yes, an account holder may withdraw funds, in whole or in part, from a first-time home buyer savings account and deposit the funds in a new first-time home buyer savings account established in the same or different financial institution for another qualified beneficiary.

Q: What happens to the funds in a first-time home buyer account when the account holder dies?

A: A financial institution must distribute the principal and accumulated interest or other income in the account according to the terms of the contract governing the account when proof of death of the account holder is furnished.

Q: Is there a maximum account balance for a first-time home buyer savings account?

A: Yes, there is a maximum account balance of $50,000, and no more contributions may be made into a first-time home buyer savings account once it reaches the maximum account balance of $50,000.  However, accounts may continue to accrue interest if the total balance has reached the maximum account balance.

Q: Are there expenses that first-time home buyer saving account funds cannot be used for?

A: Yes, funds in a first-time home buyer savings account may not be commingled with funds that would be used for purposes other than to pay or reimburse for eligible costs associated with the purchase of a single-family residence.  In other words, account funds may not be held in a first-time home buyer savings account and withdrawn and used for any purpose other than to pay or reimburse for “eligible costs,” i.e., a down payment and “allowable closing costs.” 

Q: Is there a penalty for withdrawing funds from a first-time home buyer savings account and using those funds for purposes other than to pay or reimburse "eligible costs" associated with this program?

A: Yes, funds withdrawn from an account for any purpose other than the payment of eligible costs by or on behalf of a qualified beneficiary are subject to a penalty equal to 10% of the amount withdrawn unless certain narrow exceptions apply.

Q: Under what circumstances will a withdrawal for purposes other than to pay or reimburse for eligible costs not be subject to penalty?

A:  A penalty will not apply in the following circumstances:

1. Where the funds are withdrawn due to the death or disability of the qualified beneficiary.
2. Where the assets of the account are dispersed due to a bankruptcy.
3. Where funds are transferred from one first-time home buyer savings account to another first-time home buyer savings account for the benefit of another qualified beneficiary.
4. Where the withdrawal is due to a demonstrated immediate, financial hardship.
5. Where the withdrawal is made due to the transfer or deployment out of Michigan of the qualified beneficiary who is either a member of the armed forces, a reserve branch of the armed forces, or the Michigan National Guard on active duty and where that service member provides acceptable proof of transfer or deployment to the Department of Treasury.

Q: What types of contributions can be made to a first-time home buyer savings account?

A:  Cash and marketable securities may be contributed to a first-time home buyer savings account.  Marketable securities are assets that can be liquidated quickly and converted to cash at a reasonable price, for example, common or preferred stock, bonds, or Treasury bills.  Earnings derived from these marketable securities, such as dividends or gains from the sale of marketable securities are not exempt and are subject to Michigan income tax.