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.

In his last State of the State address, the Governor announced his upcoming budget proposal (to be released on Friday) would include $200 million for Tax Credits to home buyers in California. Based upon the success of last year’s New Home Purchase Tax Credit, the Governor will propose to the Legislature that the purchasers of each new and resale home in California be granted up to $10,000 of State Tax Credit (within specific guidelines and time frames).

The idea for a California Home Purchase Tax Credit is driven by a number of factors. First, the incentive for providing the Tax Credit is the creation of new jobs. As highlighted by the California Building Industry Association (CBIA) a Tax Credit for the construction of each new home in the state generates up to 3 new jobs. Second, the Tax Credit has been shown to also generate up to $10,000 of new State revenues (through sales, income and property taxes) and up to $3,000 of local revenue (through sales and property taxes). And third, the Tax Credit also helps stabilize neighbor home prices through increased demand and sales activity.

A new twist on the proposal this year is the provision to utilize the Tax Credit for resale home purchases. This change follows the recent Federal Housing Tax Credit extension plan, which opened up the Federal Tax Credit to any purchaser of a home, not just to first time home buyers.

A number of issues will need to be worked out with the Governor’s proposal. For example, it is likely that the new State Tax Credit will follow the guidelines utilized by the 2009 Housing Tax Credit, requiring the credit amount to be spread over three years and limiting the credit amount to the amount of state tax owed by the home buyer, not to exceed $3,333 per year. Additionally, by placing a limit on the Tax Credit allocation of $200 million and opening the Tax Credit eligibility to resale and new home buyers, the Franchise Tax Board (FTB) will need to create a program allowing prospective home buyers to reserve an allocation of the limited Tax Credits at the time a purchase contract is signed for the home sale. There may also need to be a division of the Tax Credit allocation between new and resale home buyers, as the resale homes will be more available and will dominate the sales activity in the early weeks of the Tax Credit life. While this may sound like a “so what?” to most people, the job creation aspect of the stimulus provided by a Tax Credit will not achieved if only a small number of new homes buyers are able to take part in the program.

And, finally, remember this is a proposal. The Governor can not make the law, he can only approve a law drafted by the Legislature. The Governor’s budget proposal contains the provision for a Housing Tax Credit. The Administration will need to work with the State Senate and Assembly to craft the language, the rules and the “where as-es” to draft a Bill that creates a Tax Credit for California home buyers. As they say … “the devil is in the details”. Stay tuned as the adventure begins again!

The State Senate has approved an extension of the California Tax Credit for new home purchases! On October 14, 2009, the State Senate voted 35 – 1 to approve Senate Bill 37xxx. Senator Roy Ashburn (R – Bakersfield) is the author of the Bill. Senator Ron Calderon (D- Montebello) and Assemblywoman Anna Caballero (D – Salinas) are the principal co-authors. The Bill now returns to the State Assembly where it will be voted on early next week. Then it must go to the Governor’s office for approval to establish the effective date of the Bill.

The Bill allows for the 30% of the original allocation (of $100 million in tax credits) to be applied to new home purchases that closed escrow between March 1, 2009 and July 2, 2009 (and did not receive a Tax Credit allocation) and that will close escrow between the effective date of this Bill and March 1, 2010. That means approximately 4,300 additional requests for the California New Home State Tax Credit would be considered by the Franchise Tax Board. Many questions still remain with regards to the application process and existing unfulfilled application requests. For example:

1) There are 1,479 pending applications, filed through July 2, 2009, that have not received a Tax Credit authorization. Will these applications be re-visited?

2) Since the application must have been be submitted no earlier than one week prior, nor more than one week after the close of escrow, and in no case later than July 2, 2009, how many of these 1,479 pending applications are valid?

3) Any new applications will have to be submitted at the close of escrow, after the effective date of the new Bill. How many new applications will be considered?

4) The Franchise Tax Board received an average of 670 applications per week for the original Tax Credit. If half of the outstanding credits already applied for are approved, that leaves about 6 weeks for new applications to be filed. How quickly will these credits be utilized?

These and other questions will be answered by the legislature and the Franchise Tax Board in the next couple of weeks, assuming the Assembly passes SB 37xxx (they passed the earlier version of the Tax Credit Bill AB 765 by Assemblywoman Caballero, 71-4) and assuming the governor signs the new Bill into law (he has stated his intent to do so).

The next step is passage by the Assembly. That vote could come as early as October 27th. Then, it is anticipated the Governor will receive the Bill on his desk within a week. Check back regularly for further updates!

Only a little over 4 months into a year long program, the California Tax Credit for New Home Purchasers is officially dead! A victim of the state budget fiasco, the most popular and successful stimulus measure enacted during this economic disaster has been turned off. The prospects for new construction jobs and jobs in the related service industries are now growing cold. You have to wonder if anyone is in Sacramento understands how the real world operates!

Brought to life in March of this year, the California Tax Credit for New Homes has been credited with the renewed interest and increased sales of newly constructed homes. Inventory levels of new homes dropped dramatically in the first two months of the program. Followed by the start of construction on many new homes across the state. Many markets in California showed positive job growth in the construction and real estate sectors over the past two months. Building permits were being pulled in many California counties. So successful was the California Tax Credit for New Homes that the Franchise Tax Board estimated the $100,000,000 allocation would be fully subscribed by the end of June. Then, a funny thing happened.

The Franchise Tax Board came back to the legislature and informed them that there would still be money left in the allocation, if they could apply a formula to calculate the tax credit needed for each applicant, based on the applicants estimated future use of the tax credit allocation. It seems that not many California tax payers have $3,333 per year of California tax liability. The way the legislation was drafted, the Franchise Tax Board was directed to allocate $10,000 of Tax Credit for each applicant. When, in reality, the average applicant would be requesting more like $7,000 in tax credits.

The California Tax Credit for New Home Purchases is non-refundable and not eligible for a carry forward benefit. This means, the Tax Credit benefit is limited to $3,333 per year for three years. If your state tax liability was $1,333, you would not owe any state taxes that year. But the difference, $2,000, was forfeited and could not be carried forward. If the following year, your state tax was $4,333, then your tax bill would be $1,000 and you could not claim any of the previous $2,000 year difference.

Given that direction, the Franchise Tax Board told the legislature there would tens of millions of dollars available to continue the program, if the legislature modified the language directing the Franchise Tax Board to allocate an estimated tax liability per subscription instead of $10,000. Near unanimous support came from the legislature for this proposal, prior to the budget negotiations. But, during the budget negotiations the tax credits designated for the purchasers of new homes was stripped away, leaving new home buyers out of the equation.

When you look at the trillions of dollars given this year to the banks and the automobile industry and how many jobs continue to be lost in those sectors, you have to ask yourself “Where is the economic stimulus?” When you look at millions of dollars spread over three years shared with 14,000 tax payers and the thousands of jobs created by that activity, you know exactly how that stimulus program is working. Couple that with estimates as high a 3:1 return ratio for the state in tax dollars collected over the three years from increased property, sales and income taxes, you must shake your head and ask again:

“Does anyone in Sacramento know how the real world operates?”

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.

The $10,000 California Tax Credit for the purchase of a new home continues to be a major factor in the reviving new home industry. As of April 22nd, nearly $41 million of the $100 million allocation has been spoken for. That’s over $5 million per week! At this accelerating rate, the Franchise Tax Board will stop accepting tax credit applications in early July!

The $8,000 Federal Tax Credit for first time home buyers is also proving to be a big hit with home buyers. Over 600,000 home purchasers have applied for this American Recovery and Reinvestment Act benefit. And, in some situations, California new home purchasers have been able to combine both programs and apply for $18,000 of total tax credits!

Your Stimulus!

The California $10,000 Tax Credit for the purchase of a new home has made a lot of news lately.

The increase in conforming loan rates by Fannie Mae, Freddie Mac, FHA and VA have also brought home buyers back into the sales offices.

Now, we see the impact of falling interest rates. Chief Economist, Frank Nothaft from Freddie Mac announced that the 30 year fixed rate mortgage averaged 5.03% during this past week. This is good news!

That means for a home priced at $400,000, with good credit and a 3.5% down payment (loan amount = $386,000), your loan payment would be less than $2,100 per month (P&I only). This is for an FHA loan. For a VA loan (no down payment) you payment would be around $2,150 per month (P&I only).

If you buy a new home in California, you would be eligible for a $10,000 State Tax Credit. If your family income is less than $150,000 and you have not owned a home in the last 3 years, you may also be eligible for an $8,000 Federal Tax Credit. If you want to buy a home where your loan amount would be over $417,500, but less than $697,500 (in San Diego County), your rate would go up to 5.25%.

But, timing is important! According to the Franchise Tax Board, $6,987,515 of State Tax Credit has been applied for by 711 new home buyers, through March 11, 2009

With home prices back at 2002 levels (or lower), historically low mortgage interest rates, higher conforming loan amounts and up to $18,000 in tax credits, can you think of a better time to buy a new home? Many people are taking advantage of these “Buyer Friendly” market factors. And, many builders are reporting increased sales so far this year. Is this the right time for you? Stop by a Brookfield Homes sales office and let our professional sales counselors walk you through the decision making process. They will help you find the home of your dreams!

The Franchise Tax Board posted their summary of “Tax Credit for New Home Purchase” late on February 27th. This website provides answers to many of the outstanding questions on the implementation of SB 15. For example:

1. The FTB has confirmed the date they will use to determine the tax credit availability will be the close of escrow.

2. The FTB states the tax credit is not refundable.

3. The FTB states unused portions of the tax credit may not be rolled forward.

4. The FTB has provided a form for use in claiming the tax credit.

5. The form must be faxed to the FTB after the close of escrow.

6. The New Home Purchaser will receive notification of the tax credit directly from the FTB.

7. The web site will also provide a running total of the tax credits approved.

For more information, please go directly to the FTB website.

On Thursday, February 26th, the Franchise Tax Board (FTB) announced that the $10,000 State Income Tax Credit for purchase of a newly constructed home in California would be based on a first come, first served, close of escrow priority. That means the $100 million allocation created by SB 15, will be utilized quickly. Many industry professionals now believe the credit will be exhausted by this summer.

This means that buyers need to act decisively and quickly if they want to take advantage of this stimulus benefit. Please read my earlier posts regarding the California and Federal Tax Credit form more particulars.

The FTB has not yet posted the “certification form” to be used for claiming the tax credit. They believe that form will be posted later today.

The FTB is also creating a report to help home buyers understand how quickly the tax credit is being used. When these tools are posted, I will provide you the links.

Remember, the California State Tax Credit ($10,000) will be applied on a first come, first served, close of escrow basis!