Californians might be facing new taxes, again.<\/p>\n
Waves were stirred last week when Assemblymember Chris Ward (D-San Diego) introduced the California Speculation Act (AB 1771).<\/p>\n
The bill is the Assembly\u2019s latest attempt to curb rising housing costs and bludgeon investor profits. If passed, the Act would add an additional 25% tax on the capital gain from the sale or exchange of residential properties within three years of its initial purchase.<\/p>\n
In other words, California lawmakers are trying to disincentivize investor activity in the state\u2019s housing market. Yet, the bill\u2019s language will also affect the traditional homeowner, including the most vulnerable.<\/p>\n
An Overview of the California Speculation Act<\/h2>\n
The California Speculation Act carries the following provisions:<\/p>\n
- \n
- Homeowners would be taxed up to 25% on capital gain if they sell their home within three years of purchase.<\/li>\n
- The tax applies to all \u201cQualified Taxpayers\u201d.<\/li>\n
- Applies to most residential properties with few exemptions.<\/li>\n
- First-time homebuyers and affordable housing units are exempted.<\/li>\n
- 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.<\/li>\n
- Collected taxes would be put towards community investment, with 30% designated for affordable housing.<\/li>\n
- If passed with a 2\/3 vote in the Assembly, the bill would become law on January 1, 2023.<\/li>\n<\/ul>\n
What\u2019s The Story Behind It?<\/h2>\n
California\u2019s housing market is notoriously expensive. San Francisco usually charts at number one for the most expensive real estate market in the U.S. State tax rates are also among the highest in the nation.<\/p>\n
AB 1771\u2019s intention is to lower home prices by preventing investors from taking advantage of the market with cash offers. According to the bill\u2019s sponsor, Chris Ward, the Act will dissuade institutional investors who buy up homes with cash and flip them at inflated prices soon after.<\/p>\n
\u201cWe\u2019ve heard of people getting into their first home getting beat by cash offers,\u201d Ward said at a news conference<\/a>. \u201cWhen investors fall out of the buying pool, that will give regular home buyers a chance to buy a home,\u201d<\/p>\n
For Ward, prices are a major problem. As a representative of San Diego, historically one of the more affordable spots in California, he\u2019s overseen skyrocketing real estate appreciation that\u2019s put San Diego on par with San Francisco, a voting issue that does not bode well for him.<\/p>\n
Unfortunately for Ward, his bill is being faced with significant opposition.<\/p>\n
According to detractors, the main issue facing California\u2019s real estate crisis is the severe lack of housing supply. Demand has been through the rough over the past few years and supply has been exceptionally slow in catching up.<\/p>\n
California housing starts in 2021 totaled about 120,000. That\u2019s a slight uptick from 2020, but right on par with the last four or so years. It\u2019s way down from 2004 or 1988 levels though, where total units rose well above 200,000. The state is also below its construction goals, which is targeted to fall around 180,000 units per year.<\/p>\n
![\"California](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/03\/Screen-Shot-2022-03-22-at-2.03.16-PM.png\" "\\"California's")
<\/source><\/source><\/picture><\/p>\nIn essence, California is short several million housing units and is still not on track to meet demand. This, paired with high tax rates, has created a catastrophically overpriced market, locking out millions and putting an enormous amount of pressure on low-income and first-time buyers.<\/p>\n
In fact, many real estate experts are pointing out that the Act would likely exacerbate the inventory crisis.<\/p>\n
\u201cCalifornia has a meaningful affordability crisis. Unfortunately, this bill would tax most homeowners and investors alike, leading to an even worse lack of inventory, one of the leading reasons for housing price escalation. We believe this is well-meaning legislation with significant unintended consequences,\u201d said Nema Daghbandan, Partner at Geraci LLP<\/a>, the General Counsel for the American Association of Private Lenders.<\/p>\n
A leading issue with the bill is that it applies to all qualified taxpayers. Unless you\u2019re on active-duty military service or deceased, you\u2019re considered a qualified taxpayer. If you were to sell your home within a seven-year period, then you will be subjected to the tax, investor or not.<\/p>\n