"How Does a Minnesota First-Time Home Buyer Savings Account Work, and What Does the State Stop Taxing?"

Every January your bank or credit union sends you a Form 1099 with the interest your savings earned the year before, and Minnesota taxes that interest the way it taxes the rest of your income. There is one exception written into the state's own statutes, and it is for someone saving toward a first home.

A Minnesota first-time home buyer savings account is a savings account you register with the Department of Revenue on Schedule M1HOME, naming a first-time home buyer as its beneficiary. You can put in up to $14,000 a year, or $28,000 on a joint return. The state stops taxing the interest and dividends it earns, and the money pays the down payment and closing costs on a single-family home in Minnesota.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, licensed in fifteen states, including Minnesota, NMLS #483943, through C2 Financial Corporation.

Minnesota's break is on the interest the account earns. The state calls it a subtraction, which means the interest comes off the income Minnesota taxes you on, and the money you deposit is never deducted. Missouri deducts half of each year's contributions and Alabama deducts the contributions themselves, up to a yearly limit. How the Missouri first-time home buyer savings account works and Alabama's first-time and second chance home buyer savings account each walk through their own rules. So the Minnesota account's main job is to be a dedicated, organized place for the down payment to grow, with a small tax break riding along.

What is a Minnesota first-time home buyer savings account?

It is a plain deposit account with a designation attached. Under Minnesota Statutes section 462D.03, you can open an account with a financial institution and designate it as a first-time home buyer savings account, to pay a qualified beneficiary's eligible costs. Only cash can go into it, and someone other than the account holder can contribute, so a parent can add money to your account without being on it. Two of you can hold the account together only if you are married and file a joint return.

The account holder and the beneficiary are two different roles, and they can be the same person. The account holder has to name a first-time home buyer as the qualified beneficiary, and the same section says the account holder may name themselves. The Department's subtraction page has you register the account and name the beneficiary on Schedule M1HOME, filed with your Minnesota income tax return.

Who can be the qualified beneficiary?

A Minnesota resident who has not had an ownership interest in a principal residence in the past three years. Under section 462D.02, the test covers your spouse too if you are married, and the three years end on the date you buy or at the close of the tax year you claim the subtraction for, whichever comes first.

If you are married and your spouse owned the condo they lived in two years ago, the two of you are outside the three-year test even if your own name was never on a deed. If you are anywhere near that line, your tax preparer is the right person to rule on it.

The beneficiary has to be a Minnesota resident, and the home has to be in Minnesota. If you save here and then buy across the river in Hudson, Wisconsin, this account cannot pay for that closing.

How much can you put in each year?

The state law sets three limits in section 462D.03. No more than $14,000 can go in during any one year, or $28,000 for a married couple filing jointly. No more than $50,000 can go in over all the years combined, or $100,000 for a married couple filing jointly. The account itself cannot hold more than $150,000. The Department of Revenue repeats the yearly and lifetime figures on Schedule M1HOME.

Minnesota tax on the interest the account earns

Minnesota stops taxing the interest and dividends the account earns. Under section 462D.06, subdivision 1, the account holder takes that year's interest or dividends off federal adjusted gross income, which is the income figure from your federal return that Minnesota starts from. You get it for the year you open the account and every year after. The same subtraction is listed in Minnesota's income tax chapter at section 290.0132, subdivision 25. Only the account holder can claim it, so a parent who holds the account for a child claims it on the parent's return.

On the 2025 Schedule M1HOME, the year's interest and dividends go on the schedule, and the Department says you will usually find the figure on the Form 1099 your financial institution issues.

The deposits you make are after-tax money and they stay after-tax money. So the value of the subtraction is your Minnesota income tax rate multiplied by the interest. Numbers below are made up to show the mechanism, and the rate is invented, because your own rate depends on your return.

Average balance in the account this year        $20,000
Interest earned, at an invented yield              $800
Subtraction on Schedule M1HOME                     $800
                                                 ------
Minnesota taxable income reduced by                $800

At an assumed 7% state rate
Minnesota tax saved this year                       $56

In that example the break is worth $56 for the year, and it grows a little as the balance grows. The account gives the down payment its own place, with a state form that asks about it every spring and interest that Minnesota does not tax.

What can the money pay for?

The money can pay the down payment and the closing costs when the beneficiary buys a single-family home in Minnesota, under section 462D.02. It can also pay to build one, or to finance the construction. A closing cost counts when it is a payment listed on the settlement statement, which is the closing document that shows every dollar paid at the closing table.

The statute's definition of a single-family residence is wider than a detached home. It has to be in Minnesota and be the beneficiary's principal residence, and it includes a manufactured home, a trailer, a mobile home, a condominium unit, a townhome and a cooperative. The Department of Revenue prints the same list on Schedule M1HOME. So a townhome in Woodbury, a condo in Minneapolis and a new build outside Rochester all fit.

If the money is used for something else, or ten years pass

The state takes back only the tax break. If you take out more than you put in and spend it on something other than the home, the extra is added back to your Minnesota income for that year, under section 462D.06, subdivision 2. Your own deposits come back to you without being added to income, because they were never deducted, and only the amount above them gets added back.

You also owe an extra tax of ten percent of that added-back amount, under subdivision 3. The statute excuses a withdrawal because of the death or disability of the account holder or the beneficiary, and money paid out of the account in a federal bankruptcy. The Department's addition page has you figure the addition on Schedule M1HOME and carry the ten percent to Form M1.

The same rule reaches an account that is still open at the end of its tenth tax year. Whatever is in it above your total deposits is added back that year, with the ten percent on top, even though you never took it out.

Say you contributed $30,000, the account earned $2,400 that you subtracted along the way, and you take all of it out to buy a car. The numbers are made up to show the mechanism. The $30,000 comes out clean, the $2,400 goes back into your Minnesota income for that year, and you owe $240 on top of the regular tax.

Using the account on your mortgage application

On my side of the file it is a savings account in your name, and its statements show where the money came from.

At application, please provide the statements for the account, all pages, even if the last page is intentionally left blank. We will need the most recent two months. Underwriting is confirming that the money is there and that it came from somewhere ordinary. A large deposit that showed up last month gets a question, and how bank deposits get sourced in a loan file shows how to answer it before it is asked.

Section 462D.03 lets a parent put money into your account. Underwriting still reads that deposit as a gift, because it is one, so it comes with a gift letter and the paper trail that goes with it.

Underwriting reads the account the same way it reads any other savings account in your name. The balance pays the down payment and the closing costs, and anything left after closing can count toward the reserves a lender looks for.

The steps, in order

1. You confirm the three-year test with your tax preparer, for yourself and for your spouse, before you count on the subtraction.
2. You open a new account at a bank or credit union and keep it for this one purpose. A clean account gives you clean statements when underwriting asks where the money came from.
3. You put money in, within the yearly cap, and write down the year you opened it. The ten-year period in section 462D.06 runs from that year.
4. You file Schedule M1HOME with your Minnesota return. It registers the account, names the qualified beneficiary and takes the subtraction for the year's interest and dividends.
5. You get pre-approved for a Minnesota mortgage before you shop, so the price range you are saving toward is a reviewed number.
6. You pay the money out at closing on the lines of the settlement statement, and keep that statement with your tax records.

Three mistakes to avoid with the account

Expecting the subtraction to be the down payment. It reduces the income Minnesota taxes you on by the interest the account earned, and the savings inside the account buy the home.

Naming a beneficiary who is outside the three-year test. The test includes a spouse, so the home your spouse owned and lived in counts even if your name was never on it.

Letting the account run past the tenth taxable year. The earnings still in it get added back that year, with the ten percent on top.

An illustration

Numbers below are made up to show the mechanism, and they are not anyone's real account.

Say a married couple filing jointly opens the account in January of year one and contributes $12,000 a year for four years. They close on a townhome in Minnesota in May of year five. The interest figures are invented, and so is the 7 percent state rate.

Year 1 through year 4 contributions, $12,000 each   $48,000
Joint lifetime cap under 462D.03                   $100,000

Interest earned, years 1 through 4 (invented)        $4,100
Subtracted on Schedule M1HOME, 4 returns             $4,100
Minnesota tax saved at an assumed 7%                   $287

Withdrawn at closing, year 5                        $52,100
Paid on the settlement statement                    $52,100
Addition under 462D.06                                 none

All four years' subtractions stay where they are, because the withdrawal was for eligible costs and it came well inside the ten-year period. The couple saved $287 in Minnesota income tax over four years. They also arrived at closing with $52,100 in one account, with four years of statements behind it for underwriting to read.

Your next step if you are saving in Minnesota

You can run your numbers and see rates priced for your own scenario, with closing costs built against Minnesota's deed tax and mortgage registry tax rather than a national average. The option you choose can change as your plans do.

When you are close to shopping, get pre-approved for a Minnesota mortgage and I review your income, debts and credit before you write an offer. The Minnesota mortgage page covers what is specific to a closing here. After the keys, the electronic Certificate of Real Estate Value the title company usually files is what the county needs before your homestead classification can take effect.

Nothing here is a loan approval, a denial, a commitment to lend, or tax advice. Your tax preparer can confirm how the subtraction reaches your own return.

Common questions

Who can open a Minnesota first-time home buyer savings account?

Under Minnesota Statutes section 462D.03, any individual can open an account with a financial institution and designate it as a first-time home buyer savings account. The account holder then names a qualified beneficiary, who has to be a first-time home buyer and a Minnesota resident, and the account holder may name themselves. A parent can open and hold one for an adult child.

How much can I contribute to a Minnesota first-time home buyer savings account?

Section 462D.03 caps contributions at fourteen thousand dollars in any one year, or twenty-eight thousand dollars for a married couple filing jointly. Over all years combined, contributions are capped at fifty thousand dollars, or one hundred thousand dollars for a married couple filing jointly, and the account itself cannot hold more than one hundred fifty thousand dollars.

Is the money I put into a Minnesota first-time home buyer savings account tax deductible?

No. Minnesota's subtraction under section 462D.06, subdivision 1, and section 290.0132, subdivision 25, covers only the interest and dividends the account earns during the year, claimed by the account holder on Schedule M1HOME. The contributions themselves are not deducted from Minnesota income, which is the main difference from the Missouri and Alabama versions.

What counts as a first-time home buyer in Minnesota?

Under section 462D.02, you are a first-time home buyer if neither you nor your spouse has had an ownership interest in a principal residence in the past three years. Principal residence takes its meaning from section 121 of the Internal Revenue Code, the federal rule about the home you live in.

What happens if I use the money for something other than a home?

If you take out more than you put in and spend it on something other than the home, the extra is added back to your Minnesota income in the year you withdraw it, under section 462D.06, subdivision 2. Subdivision 3 then charges an additional tax of ten percent of that addition. Your own contributions were never deducted, so they are not added back. The same add-back applies to earnings still in the account at the close of the tenth taxable year.