Substitute House Bill 101 (“H.B. 101”) was broadened from a modification of village dissolution provisions into a broad-ranging budget corrections bill before its enactment on January 10, 2024 and Governor DeWine’s signing it into law on January 30. Among the budget corrections is a tightening of H.B. 33’s (the “Budget Bill”) language creating the tax deduction for contributions to homeownership savings accounts.
As a reminder, the Budget Bill created homeownership savings accounts as a vehicle whereby an individual can save for the purchase of a primary residence, receiving an Ohio income tax deduction for the individual’s contributions up to $5,000 per year, and additional deductions for the interest earned on the account and for any employer-made contributions to the account. For married taxpayers filing jointly, up to $10,000 may be deducted between them, but they must each contribute to separate accounts to accomplish that. These accounts are also intended to pay above market rates of interest compared with a standard savings account.
Contribution Limit
The Budget Bill’s language had set up these accounts with a “lifetime contribution limit” of $25,000 “per contributor per homeownership savings account.” That left open the possibility that a user of this savings tool could open a second such account and receive another $25,000 contribution limit. Not anymore. H.B. 101 gives effect to the word “lifetime” by stating that, while a second (third, etc.) account may be opened, the lifetime contribution limit for a later account is reduced by contributions to any earlier accounts, keeping the overall limit per individual at $25,000.
Account Transfers
Because multiple homeownership savings accounts are available, and the tax deduction is defined by the amount contributed to any one such account, the original law had another problem: there was nothing to keep a person from opening a second account and then transferring money from the first account, thereby earning a tax deduction for a contribution that did not involve additional savings. H.B. 101 provides that no deduction is allowed for such transfers.
5-year Limitation
Newly created division (E) of Revised Code (“R.C.”) section 5747.85 provides that “no deduction is permitted . . . for contributions made or interest earned after the conclusion of a homeownership savings account’s program period.” The “program period” is defined at R.C. 135.70(R) to be five years from the date the account was opened. This means that under H.B. 101, an individual’s homeownership savings account receives a deduction for only five years, regardless of whether the individual has purchased a home yet or reached their lifetime contribution limit. However, there is nothing preventing that individual from opening a new account to continue to contribute up to their lifetime contribution limit, and deducting the interest on the new account.
While this provision may be intended to prevent the use of these accounts as long-term tax-free savings vehicles (wherein, e.g., a parent could open the account for a young child similar to a 529 education savings account), it creates a burden for those who could not afford to contribute their maximum $25,000 in the first five years of saving for a home, in that they will have to open a new account to continue saving. Presumably such an individual can transfer the balance from the earlier account and continue to deduct the interest earned. Although the transfer itself is not deductible, the interest earned in the new account is being earned within that account’s program period.
“Homestead”
H.B. 101 also adopts the definition of “homestead” at R.C. 323.151, supplemented by owner-occupied manufactured or mobile homes in Ohio, to replace the word “home” within the definition of “primary residence,” thus clarifying the type of home that may be purchased using the funds in the homeownership savings account.
These technical changes to the homeownership savings account program help to clarify terminology and set limits that the General Assembly probably intended when it established the program in the Budget Bill.
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