Steve Doyle’s Blog

***Update – 2010 California New Home Tax Credit Take Effect 5/1/10 – Details Here***

The $10,000 State Tax Credit for the purchase of a hew home in California has proven to be a huge success! According to the California State Franchise Tax Board (FTB) over 50% of the $100 million tax credit allocation has been requested! In 10 weeks, 5,668 home buyers in California have requested $54.9 million of State Tax Credit. At this rate, the balance of the credit will be requested by early July.

Originally, the Tax Credit was adopted with a March 1, 2010 deadline and a $100 million allocation cap. Home buyers have easily recognized the value of this stimulus program and have been utilizing the Tax Credit at an increasing rate. Over the past week, the number of requests received by the FTB increased to 788 in a 7 day period. And the dollar volume of those requests increased to $7.58 million per week.

Research showed that each $10,000 Tax Credit award generated over $16,000 of new tax revenues to the State of California and $3,000 to the local jurisdiction. These tax revenues come from a variety of sources, such as: increased property tax collections, increased sales tax collections, and increased income tax collections. The tax revenue increase comes during the design and construction of the new home, and the first year following the close of escrow on the home. The tax credit is awarded over three years, at a rate of $3,333 per year, starting with the taxes paid in 2010 (for 2009 income).

The property tax increases are easy to understand. As you add new homes onto the property tax rolls, you replace the lower raw land tax valuation (that existed before the house was built), with a higher developed tax valuation (for the newly built home) that will generate the higher property tax revenue.

The sales tax increase comes from a variety of sources. Materials used during the design and construction of the new home generate sales tax revenue. Furnishings and materials purchased by the new home owner generate sales tax revenue. A lot of spending occurs during the design, construction and finally the move-in of a new home.

The income tax revenue increases come from the workers that are being paid to design, construct and sell the new home. It takes a lot of people, from architects, to contractors, to real estate brokers to complete the new home design, build and sale process. Each of these people makes their living on that new home and subsequently, pays income taxes to the State based upon their income.

There are additional economic benefits to employing these people. As the architects, contractors and sales people make their living, they in turn buy goods and services from their neighborhood retailers. The money continues to cycle through the economy, generating more economic activity and more tax revenue for the State. That is the nature of a stimulus program and that is certainly the result of the $10,000 California Tax Credit for new home purchases.