Brookfield Homes

California’s Governor Arnold Schwarzenegger is proposing a return of the Housing Tax Credit.

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!