Virginia’s First-Time Home Buyer Savings Account: How the State Tax Subtraction Works and Who Qualifies

Published November 2026 | Written by the Mission Realty Team.

Virginia’s first-time home buyer savings account lets you take the interest, dividends and capital gains an account earns and subtract them from your Virginia taxable income, as long as the money eventually pays a down payment or closing costs for someone who has never owned a home. It does not let you deduct the money you put in, it caps each account at $50,000 of principal and $150,000 in total, and it costs you a recapture plus a 5 percent penalty if the money goes anywhere else.

Everything below comes from the First-Time Home Buyer Savings Plan Act, Code of Virginia § 36-171 through § 36-175, the income subtraction in Code of Virginia § 58.1-322.02, subdivision 25, and the Virginia Department of Taxation’s page on the subtraction, all as we read them on November 5, 2026. Mission Realty is a brokerage, not a tax adviser, so treat this as a map and talk with a tax professional before you file.

The subtraction covers earnings, not deposits

This is the part most people get wrong. Contributions to a Commonwealth Savers Plan college account earn a Virginia deduction under Code of Virginia § 58.1-322.03. Deposits into the home buyer account do not. Under subdivision 25 of § 58.1-322.02, the account holder subtracts income from the account that was taxed federally as interest, other income or a capital gain. The Department of Taxation describes it the same way: income the federal government taxes is not taxed by Virginia.

So the value of the account depends on what it earns. A checking account earning very little produces a very small subtraction. A brokerage account with dividends and realized gains produces a bigger one. The Department lists the kinds of accounts you can designate, including savings accounts, CDs, money market accounts, mutual funds and brokerage accounts, and the statute requires only that the financial institution be authorized to do business in Virginia. Your bank does not have to label the account or track it. Under § 36-171, that job is yours.

One cost runs the other way. Under § 36-173(D), a capital loss from the account that you deducted on your federal return gets added back to your Virginia income.

Who counts as a qualified beneficiary

The account holder and the beneficiary can be the same person or different people. A parent can open an account and name a child. You can name yourself. The statute’s definition of a qualified beneficiary in § 36-171 has three parts. The person must:

• Live in Virginia at the time of settlement on a home in Virginia.
• Never have owned, or bought under a contract for deed, a single-family residence anywhere, alone or jointly.
• Be named by the account holder as the beneficiary of the designated account.

“Single-family residence” is broader than the name suggests. The statute includes a condominium unit, a cooperative, a manufactured home, a trailer and a mobile home, as long as the beneficiary owns and occupies it. That means a condo near the Fan, a townhome in Short Pump or a detached house in Midlothian can all qualify. The beneficiary may also buy jointly with someone else and still use the funds.

The Department’s First-Time Home Buyer Savings Account Guidelines add a few interpretations: owning land or commercial property does not disqualify you, but inheriting or being given a home does. Those guidelines were issued January 7, 2015, before the Act was amended in 2017 and 2019, so confirm any edge case with a tax professional.

What the money can pay for

The Act calls the allowed uses “eligible costs”: the down payment and allowable closing costs for a single-family residence in Virginia bought by a qualified beneficiary. Allowable closing costs are any disbursement listed on the settlement statement. That ties the account to the same Closing Disclosure or settlement statement your closing attorney or title company prepares, which is also the document you keep as proof under § 36-172.

Two limits on use matter. You cannot use the account to pay its own administration costs, although a bank’s service fee taken from the account is allowed. And the home has to be in Virginia. A move out of state before you buy means the money cannot be used for an eligible cost.

The two dollar limits, per account

Both limits apply to each account, and the Department’s guidelines say there is no cap on the number of accounts one person may designate. Only cash and marketable securities can go in. The Department’s page states that if an account holds more than either limit, or holds anything other than cash or marketable securities, no subtraction may be claimed. Its guidelines say income earned while an account is over a limit cannot be subtracted.

How to designate the account and claim the subtraction

There is no form at the bank. You make the designation on your Virginia return. According to the Department of Taxation, the first year you claim it you attach:

1. The name and address of the financial institution.
2. The names of anyone else who owns part of the account.
3. The account number.
4. The type of principal, cash or marketable securities, as of the last day of the tax year.
5. The principal and interest in the account on that day.
6. Any withdrawals during the year.
7. The beneficiary or beneficiaries.

You file updated information every year you file a Virginia return, separately for each account. The subtraction goes on Schedule ADJ, or Schedule 760PY-ADJ for part-year residents and Schedule 763-ADJ for nonresidents. Section 36-172 also requires the Form 1099 the institution issues for the account.

What happens if the money goes elsewhere

Withdraw money for anything other than an eligible cost and two things happen. First, part of the income you subtracted in past years comes back into your Virginia income. Subdivision 25 sets the recaptured share as the amount withdrawn for other purposes multiplied by the ratio of the account’s earnings to its total balance at the time. That recapture applies even after the normal statute of limitations has passed. Second, § 36-174 imposes a 5 percent penalty on the exempted income.

The Department’s guidelines give a worked example. A taxpayer who has subtracted $5,000 of income withdraws $27,500 for a non-qualifying purpose from an account holding $55,000, of which $5,000 is earnings. The recapture is $27,500 times $5,000 divided by $55,000, or $2,500.

There are three exceptions in the statute: withdrawals because of the beneficiary’s death or disability, a disbursement in a federal bankruptcy filing, and a transfer into another first-time home buyer account for a different qualified beneficiary. Knowingly filing a false claim to dodge the tax is a Class 1 misdemeanor under § 36-175.

How it fits with the rest of your down payment plan

This account is one piece of cash-to-close, not a loan program. Many Richmond-area first-time buyers pair it with a Virginia Housing loan and its income limits and down payment assistance. Others combine savings with gift funds from family, which lenders document differently, or look at using retirement funds for a down payment, which has its own federal tax rules. Your lender decides how each source is documented, so bring statements for the designated account to your first conversation.

To see what a payment looks like before you pick a price range, run numbers in our mortgage calculator, then browse homes for sale across the Richmond area, from Glen Allen to Church Hill. When you are ready to tour, our buyer process page explains how we work with first-time buyers.

First-time home buyer savings account questions