Virginia first-time homebuyer savings plan

[TheAbacus]

http://www.varealtor.com/FHSP

https://www.tax.virginia.gov/laws-rules-decisions/rulings-tax-commissioner/15-2

 

Paying no state taxes on growth does sound attractive, even though VA does not have notoriously high state taxes (unlike NY or CA).

Does anyone have any experience using this? How can one use such a provision optimally?

[jfoxcpacfp]

It's a nice gesture, I suppose, but difficult to take advantage of because of having to file the form each year in advance as you're saving (if I understand it correctly) plus if you don't use it for the closing costs, the penalty (5%) is almost as high as the taxes you save (5.75%). That is a little scary.

[TheAbacus]

Thanks for your inputs Johanna.. always appreciated.

From the Virginia Department of Taxation website:

"An individual may designate an account as a first-time home buyer savings account by submitting an attachment with his or her Virginia income tax return for the first taxable year in which such individual claims the subtraction for interest, capital gains, or other income attributable to an account."

So if I open an account this year (2017), and receive a 1099-INT/DIV, then I can submit the attachment with my 2017 state tax forms (which I will submit in 2018). The paperwork seems easy enough - it can even be done through Turbotax.

"No more than $50,000 in principal may be retained within a first-time home buyer savings account at any time."

To make things simple, one could front load the $50,000 in some account (perhaps VWEAX or VWALX - please don't hate me Johanna) and enjoy some modest tax savings in coming years until we purchase the home.

The penalty risk seems unlikely, as it would be quite unlikely for us to use the funds for anything but the house payment (the plan is to maintain a healthy emergency fund).

[jfoxcpacfp]

You know what? I missed the words "down payment" when I first read through it and thought it was for closing costs only which seemed like a really puny reward. A downpayment changes everything and definitely makes it more attractive. As long as you are sure you're staying in Virginia, I say go for it. But if you're planning on buying within the next 5 years, why not buy high quality corporate bonds instead of gambling on bond funds? So this will be for your first home?

[TheAbacus]

Yes, this will be our first home. We're committed renters since residency, and likely for another couple of years.

I like the liquidity of bond funds, as compared to individual bonds. That's probably the biggest reason I'm considering the above funds. As older bonds in the fund mature, they'll be replaced by "cheaper" higher yield bonds, so the effect of rising interest rates should be mitigated. Am I being reasonable?

[jfoxcpacfp]

It is your personal choice. What a lot of people do not seem to realize is that bond funds are an investment and can go down as well as up plus it is highly risky to hold any investment that you might need in the short term (less than 5 years). You are gambling with your downpayment. f you know you are going to need the $$ in 2 years, you'll get your principal back in 2 years with a corporate bond + some interest, but you're not going to make much in that length of time regardless. I don't know that I would use the word unreasonable; I just don't think it is a smart move.

When Low Interest Rates Are OK

[TheAbacus]

I appreciate your candor as always, Johanna. I get the feeling we've had this discussion before. Clearly, I'm a slow learner.

The only tax advantage gained by the above legislation is if there is a appreciable gain in value, which is why I am trying to find a suitable, low risk investment. This is why I was inquiring about the bond funds I mentioned above:

If you backtest a $50000 portfolio over the last 16 years, these bond funds did have significant drawdowns.

Is it a gamble? Yes it is, but looking at the maximum drawdowns these funds have had in their worst years (~11.5% in 2008) does make the risk acceptable to me for a defined sum of money. If it grows ~3-4% a year, wonderful. If it loses ~10%, then it will be limited to ~$5000 - which will hurt, but can be easily replaced by a portion of the emergency fund.

With regard to risk, it's not like corporate bonds don't have a default risk. In fact, that default risk would probably be at its peak in a 2008-like scenario. The odds of a negative outcome are low, but the severity can be severe, perhaps unacceptable.

I don't have the wealth of experience that most members of this forum have, so I appreciate that you are humoring my dissenting opinion.

[jfoxcpacfp]

Sorry, but I don't have the intelligence or time to engage in these hypothetical discussions; backtesting models and all of their iterations are of absolutely no interest to me. This is a minor issue in your overall financial life plan and we're starting to sound like "how to make money on my credit card". You know where I stand and it is rock solid. I am perfectly comfortable, however, with you making your own choices.

[TheAbacus]

I appreciate your opinion, though I'm not certain why you sound offended.

This may be a minor issue, but I was learning from the discussion. Clearly, this forum serves a different purpose to different individuals.

[jfoxcpacfp]

Awwww, I'm not offended and I'm truly sorry that I came off that way. I went back and read my answer and I do sound downright pissy, now that you mention it. But you're right that the deep investment discussions aren't my cup of tea by a long shot. Can we still be fwiends?