New 25% Capital Gains Tax on California Home Sales???

The latest attempt to create affordable housing in California is sending shockwaves through the real estate industry. And it doesn’t just impact investors. It’s a wake-up call to any California resident who likes the freedom to move to a new home when the urge strikes them! This new effort involves legislation that would create a steep capital gains tax for anyone who sells their home within seven years of buying it. Hi I’m Kathy Fettke and this is the Real Estate News for Investors. If you like our podcast, please subscribe and leave us a review. Democratic Assemblymember Chris Ward of San Diego introduced the legislation. It’s called the California Speculation Tax Act. Under this Act, the sale of a home within three years of its purchase would trigger a 25% capital gains tax. The tax would be reduced 5% for each subsequent year and disappear if the owner holds on to the property for at least seven years. Applies to All Residential Buyers/Sellers This would apply to any kind of residential property including single-family homes, condos, townhomes, multi-units, etc. And, it would apply to most individuals. First-time homebuyers would be exempt, but they would also get slapped with that tax if they buy and sell their second home in less than seven years. Active due military personnel are also exempt, along with the estate of a person who died within that seven-year timeline. There are a few other exceptions including multi-units that meet a 15% affordable housing requirement, properties with affordable deed restrictions, one-half of a subdivided property, properties that are exempt from transfer taxes, and commercial and mixed-use properties. Emergency Meeting on Flip Tax Bill The American Association of Private Lenders held an emergency meeting on March 17th with the law firm that represents the association, Geraci LLC, and Think Realty. Nema Daghbandan (neema dahg-ban-dun) of the association acknowledged that California has done some good things recently to create affordable housing. That includes laws that allow ADUs and the subdivision of single-family homes and/or properties. But he says this bill will not contribute to California’s housing affordability goal. He claims: “There’s no actual direct relationship as to how this will reduce the amount of people purchasing property or who isn’t purchasing it. Because ultimately what will happen for people who buy and hold for short term, all they are going to do is instead purchase these properties, hold them as rental properties, and then jack up the rent on renters. That’s all that’s going to happen. It doesn’t do anything to create housing stock.” Early Stage of the Legislation The legislation is still in committee as a draft version, but real estate professionals say now is the time to speak up. They say the legislation is not only bad for California, but a bad precedent for other states. It’s the kind of legislation that can grow legs if it’s passed in one state. In fact, a similar bill was proposed and defeated in New York a few years ago, so there’s some momentum for this kind of approach to the housing situation. The California bill began as a response to data from the California Association of Realtors. It said that investors accounted for 51% of residential sales in the third quarter of last year, while the national average was only 19%. That spooked lawmakers who quickly churned out this legislation. Their hope? To keep investors from outbidding regular folks who are buying homes for their personal use. But that’s wrongheaded at best, and really bad for anyone who buys a home in California, whether they are an investor or not. It Won’t Create More Housing What will this legislation really do? The California real estate insiders say it won’t put more homes on the market. Instead, it will shrink the inventory of homes because homeowners who want to sell will be forced to rent their homes until the seven years are up. If this becomes law, it will also contribute only 30% of the funds to the creation of affordable housing. Another 20% will be given to schools, 40% to infrastructure, and about 10% for the administration of the program. Plus, the money would go to the taxpayer’s county and not the county where the property was sold. Will it discourage investors? Likely, yes, but with bad results for California. Investors help create housing by renovating homes which improve neighborhoods and communities. That also helps local governments meet state mandates for the creation of new housing, which, critics say, they can’t do without the help of the private sector. Why Defeat this Bill? Five important reasons to defeat this bill include: 1 - It does not create affordable housing or reduce home prices. 2 - It would discourage people from moving to avoid the tax (and stifle the market). 3 - It would only contribute 30% of the funds toward the creation of affordable housing. 4 - It would contribute the rest of the money to the taxpayer’s county and not the county where the property was sold. 5 - It would apply to all homeowners even though it is meant to discourage investors. If you’d like to find out what you can do to voice your opinion about this you’ll find a link in the show notes at newsforinvestors.com. Also, please remember to hit the subscribe button, and leave a review! You can also join our real estate investor network for free at newsforinvestors.com. That gives you access to the Investor Portal where you’ll find information on rental markets and sample property pro-formas. You can also connect with our experienced investment counselors, property teams, lenders, 1031 exchange facilitators, attorneys, CPAs and more. Thanks for listening. I'm Kathy Fettke. Links: https://aaplonline.com/articles/advocacy/ca-flip-tax/