It appears the Legislature is responding to the Governor’s call for quick action on bills that promote job growth and provide economic stimulus. AB 183 has been transformed to an appropriate legislative bill for tax credits for home purchasers from it’s earlier format. The new AB 183 follows closely the language of other pending bills (SBX8 21, Ashburn and ABX8 34 Jeffries) that are currently inactive.

The focus of AB 183 is the implementation of a new California Tax Credit for the purchase of a home. The particulars are as follows:

1. The purchase of a qualified principal residence on or after May 1, 2010 and on or before December 31, 2010 and before August 1, 2011, pursuant to a contract executed on or before December 31, 2010, on a first come, first served basis or until the allocation of $200,000,000 is exhausted in accordance with terms of this legislation.

2. Up to $10,000 of California Tax Credit, per qualified purchaser, to be allocated over three years, beginning with the year the escrow closes on the new home.

3. The total allocation of $200,000,000 in tax credits is divided between first time home buyers and purchasers of new homes, with $100,000,000 being allocated to each type of purchaser.

4. The reservation of a tax credit may be achieved by submitting a jointly signed certification to the Franchise Tax Board (FTB) at the time of execution of the contract to purchase. The FTB shall be responsible for creating the necessary forms and procedures for claiming the reservation of the tax credit. The tax credit is then allocated to the purchaser by submitting evidence of a certification of the close of escrow on the reserved tax credit residence.

5. A “qualified principal residence” is an attached or detached home that will be used as the principal residence of the purchaser, and has either never been occupied or is purchased by a first time home buyer.

6. A “first time home buyer” is and individual who has no present ownership interest in a principal residence now or over the three previous year period, ending on the date of purchase.

7. The tax credit is non-refundable, meaning it is a use it or lose it credit. You would need to have $3,333 of state tax liability each of the next three years to utilize the maximum amount of the credit available.

8. The amount of the tax credit is the lesser of 5% of the purchase price or $10,000, which means any home over $200,000 in price will be limited to the $10,000 credit.

9. You must be 18 years of age and not claimed as a dependent on someone else’s tax return to be eligible to claim this tax credit.

10. Because of the way FTB will calculate the number of individual purchases available to receive the tax credit, it is estimated that approximately 14,250 new home purchasers and 17,500 first time home buyers will be eligible for the 2010 California Tax Credit.

There are a number of rules, forms and procedures that will need to be created by the FTB for the regulation of this tax credit program. And, all these specific points regarding this legislation are preliminary, subject to change and still in draft form until the Governor signs the final language of the bill!

The question most consistently asked about the “interim period” between the New Home Buyer Tax Credit of 2009 and the adoption of this new 2010 Home Buyer Tax Credit appear to be answered by the legislation decision not to address the issue. That is, if you were disallowed a tax credit in July of 2009, because the FTB ran out of credit, or if you purchased and closed on a home between the middle of July 2009 and May 1, 2010, this legislation does not authorize the purchaser to receive a tax credit. The only avenue available to such a purchaser appears to be the Federal Tax Credit program.

And finally, today’s vote was very important, but three hurdles remain. First, a vote on the Senate floor. Second, a re-affirmation vote by the Assembly. And third, approval and signature by the Governor of the final legislation. Stay tuned for more updates.

SBX8 21, by Senator Ashburn has been introduced into the California State Senate. And, ABX8 34, by Assemblyman Jeffries has been introduced into the California State Assembly. Both of these bills would create a $10,000 tax credit per qualified buyer, to be paid over a three year period. Both bills are introduced into the Special Session #8 of the Legislature and could become law by passage during the special session. Both bills call for a May 1, 2010 start date, to coincide with the completion of the Federal Tax Credit program currently in place. For any other particulars of these bills, please see the links highlighted above.

The bill will normally undergo a series of changes as they work their way through the legislative approval process. Differences in the bills may arise as amendments and edits are made along the approval path of each chamber. There are a few key issues to keep watch over as the bills progress. First, the start date is a key issue. The Federal Tax Credit applies to purchase contracts entered into by April 30, 2010 and the home closes escrow by June 30, 2010. Starting the California Tax Credit on May 1, 2010 provides for a continuity of benefits available to the California purchaser. This continuity is important to maintain the construction of new homes (hence the benefits the State receives by offering the Tax Credit) and to support the confidence that is building in the demand for new homes. Any gap in this time line, from the Federal Tax Credit closing and the State Tax Credit opening, could create a hesitation in the minds of buyers and hence a slow down in the jobs recovery.

Another key issue is the direction to the Franchise Tax Board (FTB) to create a “reservation system” for the State Tax Credit. Again, modeled after the Federal Tax Credit, the reservation system allows buyers to contract for the purchase of a new home and receive a “reservation” of a future Tax Credit from the FTB. This approach allows buyers to purchase homes during the availability of the Tax Credit and close escrow at some time in the future, when the home construction is complete. It adds surety for the buyer that they will receive a Tax Credit and incentive for the home builder to create those needed construction jobs.

Most of the other qualifications for the Tax Credit remain consistent with the 2009 version. A new provision would cover First Time home buyers. The 2009 Tax Credit applied only to newly constructed homes, because of the greater surety around job creation and fiscal benefits to the state. The 2010 Tax Credit provides a portion of the Tax Credit Allocation be set aside for first time home buyers. There is no restriction for First Time home buyers to buy a newly constructed home. This provision will be a source of debate among the legislators. As proposed, the Ashburn and Jeffries bills each set aside $100 million for the qualified purchasers of newly constructed homes and $100 million for the purchase of homes by qualified first time buyers. This new provision will be ironed out through the legislative process.

Stay tuned for more information as the process unfolds.