Could a proposed savings plan help first-time home buyers make down payments? What to know.

PROVIDENCE − Two bills introduced in the Rhode Island legislature would make it a little easier on would-be home buyers by creating a tax-advantaged account for down payments and by making it more expensive for corporations to buy single-family homes.

Rep. Brian Newberry, R-North Smithfield, said the two bills are meant to ease the state's housing crisis but are by no means the solutions.

"This is two ideas to help alleviate the issues, combined with the other things we're doing in the state," Newberry said.

Would a tax-advantaged savings program help first-time buyers?

Would allowing Rhode Islanders to save pre-state income tax money in a fund administered by the state treasurer's office, that could only be used for a down payment on a house, help?

That's the idea being floated by Newberry after brainstorming by his staffers. The program would largely operate like the current 529 plans, tax-advantaged accounts that pay for students' future education expenses and are sheltered from federal and state taxes.

"Down payments are the biggest obstacles," Newberry said, referring to first-time home buyers in a market where the median price of a single-family home is around $430,000.

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When Newberry and his wife bought their house in 1996, they didn't have the money needed for a down payment, so his parents were co-signers on a Federal Housing Administration loan, something that is no longer allowed. Creating a tax-advantaged plan would help people, like his son, save up the down payment required to buy.

While Congress is debating legislation that would federally recognize these types of plans and give them the same federal tax shield that 529 plans receive, if Newberry's bill becomes a law, the accounts would only save buyers on state income tax, not federal.

"It's a good thing, maybe not a huge impact, some impact, that maybe would help some people," he said.

The bill has not been scheduled for a hearing.

How much would someone save with a 529 plan for down payments?

The bill as written, H 7683, would allow someone to contribute up to $50,000 in the state tax-sheltered account, which would then grow based on treasurer-chosen investments, growing to a maximum of $150,000.

Any growth would be sheltered from state taxes when taken out for a down payment.

More: Rhode Island's housing crisis is at a breaking point. How did we get here?

But how would it work in practice for a person making 100% of the area median income in Rhode Island, $74,200?

Rhode Island has a graduated income tax:

• Income up to $73,450 is taxed at 3.75%

• Income from $73,450 to $166,950 is taxed at 4.75%

• Income over $166,950 is taxed at 5.99%

According to a tax table provided by the state, our theoretical single person has a state tax bill of $2,791 each year.

If they contributed $10,000 to the state-tax-sheltered down payment account, their tax bill would go down to $2,408, a savings of $383.

Let's say our would-be buyer has some savings in the bank but isn't ready to buy yet, and they contribute the maximum, $50,000. They would see a one-time tax savings of $1,883 (a normal state tax bill of $2,791 reduced to $908).

While the tax savings may not be large, part of the idea of 529 accounts is to help people save in the first place, Newberry said.

How does the treasurer's office feel about the 529-like program proposal?

The Office of the General Treasurer would be responsible for administering the plan.

In an emailed statement, Treasurer James Diossa wrote that he is "generally supportive" of ways to help homebuyers, and that he looks forward to "learning more about the specifics of the bill," which he said was drafted and introduced without his input.

A copy of the bill was sent to Diossa in a request for comment by The Providence Journal, along with a request for information on how the 529 plans his office administers are doing. The last reports available for the 529 program available on the state treasurer's website date from 2020.

Levying extra taxes on corporate purchases of single-family homes

The other idea being proposed by Newberry, in bill H 7683, is to levy an extra tax on would-be corporate buyers of single-family homes as the anxiety over corporate ownership in other parts of the country spills over into Rhode Island.

The idea is to increase the tax paid by large corporate owners for buying a single-family home – an estimated $5,000 in extra tax on a $400,000 purchase – which should be a disincentive to enter the market in Rhode Island.

When a would-be corporate landlord crunches the numbers, their likely cash offer will likely be lower to account for the extra taxes, giving home buyers who can't pay in cash a leg up with higher offers made with conventional financing. Any money raised by the tax would go into a subsidized housing fund.

The tax would apply to corporations with more than $15 million in assets.

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Reach reporter Wheeler Cowperthwaite at wcowperthwaite@providencejournal.com or follow him on Twitter @WheelerReporter.

This article originally appeared on The Providence Journal: RI bill would create 529-like plan for housing down payments