How does Virginia's first-time home buyer savings account work?

Virginia’s first-time home buyer savings account is a state tax break, not a special bank product. You pick an account you already have or open one at a financial institution, designate it on your Virginia income tax return, and the interest, dividends and capital gains it earns come off your Virginia taxable income. The money has to go toward the down payment or closing costs on a single-family residence in Virginia for someone who has never owned a home, and Virginia caps each account at $50,000 of contributions and $150,000 total.

The rules come from Chapter 12 of Title 36 of the Code of Virginia and Virginia Tax’s guidance on the subtraction, both linked throughout. Your tax professional is the right person to apply them to your return.

Who can use the money?

The person the account is for, called the qualified beneficiary, must meet all three tests in Va. Code § 36-171:

• They’ve never owned a single-family residence, alone or jointly, in Virginia or anywhere else, and never bought one under a contract for deed.
• They’re named as the beneficiary of the account.
• They live in Virginia at the time of settlement on the purchase.

The account holder and the buyer don’t have to be the same person. Virginia Tax says the beneficiary “can be you, or someone named by you,” so a parent or grandparent can save for a child’s first home. The beneficiary can also buy jointly with someone else and still use the money.

“Single-family residence” is broader than a detached house. The statute counts a condominium unit, a cooperative and a manufactured home, as long as the beneficiary owns and occupies it.

What can the money pay for?

Only “eligible costs”: the down payment and “allowable closing costs,” which the law defines as disbursements listed on the settlement statement for the purchase. That’s the document your settlement agent prepares at closing, so keep it. Va. Code § 36-172 requires the account holder to keep documentation of the eligible costs.

Our guide to buyer closing costs in Virginia covers what typically shows up on that statement.

What are the limits?

Rule	Limit	Source
Contributions (principal) per account	$50,000	Va. Code § 36-173
Principal plus earnings per account	$150,000	Va. Code § 36-173
What you can put in	Cash and marketable securities only	Va. Code § 36-173
Account types	Savings, CDs, money market, mutual fund, brokerage and other accounts	Virginia Tax
What it saves	Virginia income tax on the account’s earnings	Va. Code § 58.1-322.02, subdivision 25

Virginia Tax says that if an account goes over those limits, or holds anything other than cash or marketable securities, no subtraction can be claimed. The limits apply per account.

Two things the account doesn’t do: it doesn’t give you a deduction for the money you put in, and it doesn’t change your federal taxes. Virginia Tax describes the benefit as income “taxed by the federal government” that “is not taxable by Virginia.”

How do you set one up?

Your bank doesn’t do it for you. Va. Code § 36-171 says financial institutions don’t have to designate the account, track withdrawals or report anything. It’s all on your return.

For the first year you claim the subtraction, Virginia Tax asks you to include:

• The name and address of the financial institution and the account number
• The names of anyone else with an ownership interest
• The type of principal (cash or marketable securities) contributed as of December 31
• The principal and interest in the account as of December 31
• Any withdrawals during the year
• The beneficiary or beneficiaries

You claim the subtraction on Schedule ADJ (760PY-ADJ for part-year residents, 763-ADJ for nonresidents) and submit updated information every year you keep filing. Virginia Tax’s First Time Home Buyer Savings Account Guidelines, linked from its subtraction page, have the details.

A practical tip: keep the house money in its own account. The law requires the account holder to document that the funds are kept separate, and mixing in everyday spending makes that harder.

What happens if you use it for something else?

You pay it back, plus a penalty. Under Va. Code § 36-174, money withdrawn for anything other than eligible costs triggers a 5% penalty on the income that was exempted, and the earlier subtractions are recaptured, meaning added back to your Virginia income. Virginia Tax notes that applies “no matter when the withdrawal happens.”

There are three exceptions: withdrawals because the beneficiary died or became disabled, a bankruptcy disbursement, and a transfer into another first-time home buyer savings account for a different beneficiary. That last one matters for families. If one child ends up not needing the money, it can move to a sibling’s account without the penalty.

Is it worth it?

The benefit is only as big as the account’s earnings. On a savings account or CD, the Virginia tax you skip each year is modest. It adds up more over several years, with a larger balance, or with investments that produce capital gains. The trade-off is the restriction: if the beneficiary might never buy, or might buy outside Virginia, the penalty and recapture can undo the benefit.

It also doesn’t replace other help. Virginia Housing offers a Down Payment Assistance Grant and other first-time buyer programs with their own income and price limits, and a lender can tell you whether you qualify. Savings from this account and those programs answer different questions: one is how you save, the other is how you finance.

What should you do next?

If you’re saving toward a first home, it helps to know what you’re saving for. Our checklist on what to do before you start house hunting in Virginia walks through budgets and pre-approval. When you’re ready to talk through prices and timing in Richmond, Charlottesville or Lynchburg, start a buyer conversation with our team.