Under the heading, “Be careful what you wish for,” there is the California Housing Speculation Act.
The legislation in California was intended to solve a problem; instead, many real estate agents and mortgage lenders now are concerned the cure is worse than the disease.
To understand the issue, it began when the California Association of Realtors published a report noting that 51% of the homes sold in the state in the third quarter of 2021 were purchased by investors. The national average for investor purchases is 19%.
This raised concerns that the average person hoping to buy a home in California was being kept out of the market by investors, and that investor purchases were increasing the sale prices of the properties, making it even more difficult to afford a home in the state.
Legislation (AB 1771) known as the “California Housing Speculation Act” was introduced in the California legislature in an attempt to address the problem.
As proposed, the bill would add up to 25% in capital gains tax on the sale or exchange of nearly every residential property in the state that is bought and then resold in fewer than seven years. While the tax would be applied on a sliding scale, any home purchased and then resold in fewer than three years — regardless of the reason — would face the 25% tax, on top of any federal capital gains taxes that may apply.
The timeline and amount of additional capital gains tax proposed in the legislation is as follows:
- Sold in less than 3 years: 25%
- Sold in 3-4 years: 20%
- Sold in 4-5 years: 15%
- Sold in 5-6 years: 10%
- Sold in 6-7 years: 5%
- Sold in 7 years or more: 0%
Concern about the unintended consequences of the legislation is so high, three organizations have called an “emergency meeting” on Thursday for interested parties to discuss how to oppose it as written.
The meeting has been called by the American Association of Private Lenders (AAPL), Think Realty, and the Geraci Law Firm, though the three organizers say additional organizations are mobilizing for the fight.
The Geraci Law Firm, which serves as general counsel for AAPL, produced a video explaining the bill and the issues with it. Presented by law firm partner Nema Daghbandan, the video has been shared via email and social media.
“Folks, you know if I’m in front of a white board it means that there is a major legislative proposal which impacts you,” Daghbandan wrote on LinkedIn. “The latest edition of well-intentioned, poorly executed proposed legislation is brought to you by none other than the great state of California.”
The email, which was sent jointly by the law firm, AAPL and Think Realty, states that legislators proposed the bill “on the misguided notion that soaring prices of California homes are driven by investor-purchasers of residential properties in California. The bill lacks nuance, with the chief issues being:
- There are no carve-outs or exemptions for equity earned through property improvement, and
- Except for a few narrowly-defined cases, the bill even lumps in consumer homeowners.”
The email contends that the legislature’s efforts to curb real estate speculation “will decimate the rehabilitation of sub-standard, derelict, or vacant housing stock.”
It continues: “The tax means there will be … little or no return on investment for fix-and-flip professionals making needed renovations. The bill also removes one of the chief draws of homeownership vs. renting — the potential to earn equity — for those not absolutely certain of their ability to stay in their homes for the duration of legislators’ arbitrary timelines, or who must sell due to exigent circumstances.”
Finally, it adds, “While the bill text says the purpose is to put the resulting tax funds toward affordable housing, only about 30% of the additional taxes are specifically allocated for such efforts. The monies raised will also be distributed to communities based on where the taxpayer resides, not where the ‘needed affordable housing’ property is located.”
The email sent by the three organizations includes a link to register for the “emergency meeting,” which will be held in a free, online webinar format. It is scheduled to be held March 17 at 6 p.m. EST. You can register here.
You can download a three-page analysis of the bill here.