As a homeowner, you want to get the most out of your investment. Whether you're planning to sell your home soon or just want to increase its value over time, there are several steps you can take to
California Speculation Tax - Implications for Homeowners and Investors
Dated: March 30 2022
Views: 241
At a time when people are feeling the harsh effects of inflation across all goods and services, Californians are now facing a new tax! Without getting into the politics behind this we are going to explore the intent, details and possible effects on our local housing market.
The California Speculation Act (AB-1771) has been introduced by Assemblymember Chris Ward (D-San Diego). This bill, if passed, would mean an additional tax of up to 25% on almost all properties sold within 7 years of the date they were purchased.
Why is this tax being introduced?
The intent of this tax is to target investors who are being blamed for soaring home prices. Investors are generally able to make cash offers and the sponsors of the bill claim that this is making houses less affordable for occupant home buyers. Lawmakers are trying to make it so that real estate investors will be at a financial disadvantage and will not invest in houses in California. The overall desired effect is a reduction in house prices.
How exactly will it work? Will it apply to me?
- Homeowners would be taxed up to 25% on capital gain if they sell their home within three years of purchase.
- Properties sold within three years are subject to a 25% tax. After three years, the rate declines by 5% each year until seven years have passed.
- The tax applies to all “Qualified Taxpayers”, it will be applied indiscriminately to both investors and homeowners. It applies to most residential properties with few exemptions. First-time homebuyers and affordable housing units are exempted.
- It appears it would also apply to properties being sold as part of a 1031 Exchange.
- Collected taxes would apparently be put towards community investment, with 30% designated for affordable housing.
- If passed with a 2/3 vote in the Assembly, the bill would become law on January 1, 2023.
Will it be effective? How will this change the housing market?
This proposed law is clumsy and naive to say the least.
Perhaps the most obvious problem with this bill is the indiscriminate application. Homeowners who are required to move for work or personal reasons will also be hit by this tax. In a market where home prices are rising, this will mean that the appreciation of their existing home, which would be used to help them buy their next home, will have a slice taken out of it creating an affordability issue with their next purchase. There is also no provision for if a homeowner makes improvements to their home that increase the value, so when it’s time to sell you can say goodbye to all of the money you spent remodeling the kitchen, replacing your HVAC or putting on a new roof!
“Investors” is a very broad term when it comes to real estate. There are many different strategies. The types of investors that are most commonly associated with outbidding home buyers by using cash offers are Institutional Buyers including Wall Street funds such as BlackRock. These buyers typically buy and hold these properties as long term rentals and therefore would not be subjected to this tax! It is also worth noting that these institutional buyers are only buying in limited markets (such as Sacramento) and are not even active in our market here in Butte County.
The way that the bill is set up will most heavily target investors known as “flippers”. These are investors that buy properties that are in poor condition, make repairs and improvements and then sell the properties for a profit. The reality is flippers need to buy properties for a discounted price if they want to make any profit over and above the cost of the repairs. That means that flippers are not out there getting into bidding wars with buyers intending to pay full retail price for a home to live in. Additionally, flippers usually buy properties that are damaged and dilapidated and would not even qualify for a mortgage loan.
The driver behind the increasing cost of homes is a lack of inventory. Flippers actually provide a service by creating inventory that would otherwise not exist. Stopping them from doing this activity would mean that dilapidated homes would remain in a condition where they could not be purchased by those needing a mortgage and therefore sit vacant. The only reduced house prices we might see are in neighboring properties!
It is highly likely that this ill-conceived law will do far more harm than good.
What can I do if I oppose this new tax?
First of all, raise awareness. Share a link to this article with friends and family members.
We fully encourage people to seek out more information on AB-1771. You can see the full details of the bill HERE.
The law still needs to be passed with a two thirds majority by lawmakers so the most important thing you can do is to communicate with your elected officials. If you are in Butte County you can contact Assemblyman James Gallagher HERE.
Nick & Brittney Allison
We are a Husband-Wife real estate team located in Chico and serving the wider Butte County area. As professional full-service Realtors, we are able to assist buyers, sellers and investors at all stage....
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