Convention Center
Thursday, June 10, 2010
1:00 p.m. – 2:50 p.m.
Sacramento
Mission Statement:This Committee is a Policy committee. Its mission is to develop C.A.R.'s government finance and taxation policy. It has original jurisdiction to evaluate legislation and regulation in the following issue areas as they relate to real estate:
Commercial Investment
Government Finance
Property Tax
Transaction Tax
Presiding:
Dennis Badagliacco, Chair
Patricia Bouie-Hinds, Vice-Chair
Issue Chairs:
Virginia Butler, Property Tax
Skip Zeleny, Government Finance
David Zigal, Commercial Investment
Phil Schafer, Transaction Tax
Liaisons:
Kevin Brown, Executive Committee Liaison
Becky Blair, NAR Commercial Alliance Committee Representative
Leslie Munger, NAR Federal Taxation Committee Representative
CAR Staff:
Christopher Carlisle, Legislative Advocate
Matt Roberts, Federal Government Affairs Manager
I. Welcome and Opening Comments – Dennis Badagliacco, Chair
II. State Taxation Issues
A. Action Items:
1. The Amount of Transfer Tax Paid – And Thus Home Price – Cannot Currently Be Kept Confidential – The party recording the document conveying real property can under existing law request that the amount of the documentary transfer tax due be shown on a separate paper. This was intended to allow individuals to keep the amount of the tax and, thus, the price paid for the real property, private. However, in July 2007, Attorney General Jerry Brown reiterated in a published opinion that the internal accounting records of county recorders are subject to inspection under the Public Records Act. As a result, C.A.R. staff was contacted by the representatives for the County Recorders Association of California to determine what C.A.R.’s position would be if legislation were introduced to eliminate the ability of the individual paying the tax to request that amount of the tax due be shown on a separate paper. C.A.R. staff discussed this issue with the leaderships of both the Taxation and Government Finance Committee and the Transactions and Regulatory Committee, and there was a split of opinion. Clearly, there is a tension between the desire for privacy on the part of the homebuyer and the need of potential homebuyers to know how much is appropriate to pay for a home in that neighborhood.
2. State Law Does Not Require Local Governments to Post Agendas, Etc. on Their Web Site – The Marin Association of REALTORS® approved a motion supporting amending state law to “require that those governed by the Brown Act post on their existing Web sites links to, or full and complete information about, upcoming meetings and public hearings. This information should include agendas, staff reports or other information that will be considered at those meetings, and must be clearly labeled and described.” If the locality has a Web site, it should be a relatively simple matter to post agendas and staff reports on the site. Such a requirement in state law would allow individuals interested in the actions of a particular local government to regularly check that locality’s Web site to get complete information about upcoming meetings. In addition or as an alternative, legislation could be introduced that eliminates the exemption provided to local governments from having to hold a separate public meeting at which testimony is taken prior to the hearing at which an increased or new fee is voted upon.
3. Legislation Would Impose Insurance Surcharge to Fund Disaster Preparedness – Governor Schwarzenegger has proposed an Emergency Response Initiative to fund emergency response preparedness via a 4.8 percent surcharge on all commercial and residential property insurance policies. The revenues will be used to augment program expenditures in three state departments with emergency response responsibilities and to support a grant program for local agency emergency first responders. Senator Christine Kehoe has introduced the governor’s proposal as SB 1258 believing that state and local governments lack the financial resources to adequately fund mutual aid responsibilities that serve all Californians. However, according to the Legislative Analyst’s Office (LAO), the Governor’s proposal “does not tie the proposed surcharge to the direct beneficiaries of these services” and, as a result, the surcharge is a tax. The LAO believes that the primary beneficiaries of the surcharge will be those property owners who reside in the State Responsibility Areas (SRAs) – wildland areas that are the sole responsibility of CalFire. Consequently, the LAO recommends that a fee be assessed on the direct beneficiaries of the state’s fire protection services – in other words, the property owners in the SRAs.
B. Discussion/Reporting Items:
Government Finance – Skip Zeleny, Issue Chair
1. May Budget Revision – The Governor’s May Revision projects a budget gap of $19.1 billion. This figure is comprised of a current year (2009-10) shortfall of $7.7 billion, a budget year (2010-11) shortfall of $10.2 billion and a proposed reserve of $1.2 billion. $3.4 billion of the gap is proposed to be closed by shifting funds and using alternative funding; reliance on federal funds account for another $3.4 billion. The balance of the gap – $12.4 billion – is proposed to be closed through expenditure reductions. The May Revision proposes to eliminate child care programs except for pre-school and after school care, to eliminate the California Work Opportunity and Responsibility for Kids Program (CalWorks), and to reduce funding for local mental health services by approximately 60 percent.
2. SB 1123 (Negrete McLeod) Expansion of DRE “Poison Pill” to Special Funds – During the 1990’s the Governor and Legislature both raided and borrowed DRE reserve funds to help balance out the budget’s general fund during budget crises. In response, C.A.R. sponsored legislation to create a two part “poison pill” that would roll back licensee fees to 1982 levels if DRE funds were raided and/or borrowed by the general fund or if DRE reserves exceed 18 months. As a part of the 2009 budget bill, the legislature loaned $500,000 from the DRE operating reserve to the Department of Justice to start up a new foreclosure consultant registration program. This loan did not trigger the so-called “poison pill” statute and roll back license fees because the recipient was another special fund and not the state’s general fund. C.A.R.'s Board of Directors has approved the sponsoring of legislation in 2010 to prevent DRE reserve fund transfers (“loans”) to other special fund accounts.
Position: Sponsored Bill
Status: Senate Appropriations, Suspense File
3. AB 183 (Caballero & Ashburn) Homebuyer Tax Credit – AB 183 provides $200 million for homebuyer tax credits for new and existing homes. The bill allocates $100 million for qualified first time home buyers of existing homes and $100 million for purchasers of new, or previously unoccupied, homes. These tax credits are available for taxpayers who purchase a qualified principal residence on or after May 1, 2010, and before January 1, 2011. Additionally, these tax credits are available for taxpayers who purchase a qualified principal residence on or after December 31, 2010, and before August 1, 2011, pursuant to an enforceable contract executed on or before December 31, 2010. The purchase date is defined as the date escrow closes. The tax credit is limited to the lesser of 5 percent of the purchase price or $10,000 for a qualified principal residence. Taxpayers must apply the total tax credit in equal amounts over 3 successive tax years (maximum of $3,333 per year) beginning with the tax year in which the home is purchased.
Position: Support
Status: Signed into Law by the Governor on March 25, 2010 (Chapter 12, Statutes of 2010)
4. SB 401 (Wolk) Federal Tax Conformity/Debt Forgiveness – This is a tax conformity bill which, among other things, conforms to the federal law which does not require borrowers to pay income tax on debt forgiven in a “short sale” through December 31, 2012. While C.A.R. supports phantom income debt forgiveness, it did not support SB 401 as it contained numerous other provisions.
Position: Watch as Amended
Status: Signed by the Governor on April 12, 2010 (Chapter 14, Statutes 2010)
5. Capital Gains
a. SB 1416 (Walters) Senior Capital Gains Exemption – Current law reduces capital gains tax by permitting single individuals to exclude up to $250,000, and married couples to exclude up to $500,000, of the net gain from the sale of their home. Beginning January 1, 2010, SB 1416 would, for California state income tax purposes, exempt individuals 65 years of age or older from paying capital gains tax on the sale or exchange of their principal residence. C.A.R. supports SB 1416 because it will protect seniors who are often on a fixed and/or limited income from paying additional income tax on the money they received from the sale of their home.
Position: Support
Status: Senate Revenue and Taxation Committee, Suspense File
b. SB 10 of the Sixth Extraordinary Session (Dutton) Capital Gains – Current law reduces capital gains tax by permitting individuals to exclude up to $250,000, and married couples to exclude up to $500,000, of the net gain from the sale of their home. Beginning January 1, 2013 and ending January 1, 2016, SB 10 of the Sixth Extraordinary Session would, for California state income tax and corporate tax purposes, exempt 50% of any net capital gain from the sale or exchange of a capital asset that was held for more than three years. C.A.R. supports this bill because it gives property owners another option to limit their income tax liability that can result from the sale of residential and commercial property.
Position: Support
Status: Senate Revenue and Taxation Committee, Suspense File
Commercial Investment – David Zigal, Issue Chair
1. AB 1103 (Saldana) Commercial Building Energy Star Benchmarking Program – Since the passage of AB 1103 (2007), C.A.R. has been participating as a stakeholder in developing the Commercial Building Energy Star Benchmarking program which will require building owners to benchmark the energy usage of all nonresidential buildings and disclose this information to a prospective buyer, lessee or lender when an entire building is sold, leased financed or refinanced. Currently, the draft language for the proposed regulations is being finalized and will be released to the public for comment in June. The program regulations will go into effect on the following schedule: January 1, 2011: buildings solely occupied by the owner or which are more than 50,000 square feet, January 1, 2012: buildings of 10,000 to 50,000 square feet, July 1, 2012: buildings of less than 10,000 square feet.
2. 1031 Property Exchanges
a. AB 2640 (Arambula) 1031 Property Exchanges – As introduced, AB 2640 would have eliminated state conformity with federal tax law relating to 1031 exchanges. In other words, if this bill were to pass, tax deferred exchanges while still possible for federal tax purposes would not have enjoyed tax deferred treatment for state tax purposes. In early April, C.A.R. obtained amendments that removed this provision from the bill. As amended, C.A.R. is neutral on AB 2640.
Position: Watch as Amended
Status: Assembly Revenue and Taxation Committee
b. SB 1316 (Romero) 1031 Property Exchange Limitation – SB 1316 was recently amended to create a state tax credit for investments in low income communities. The credit would be funded with revenues obtained by eliminating the capital gains exclusion for 1031 exchanges in which a California property is exchanged for an out-of-state property. C.A.R. opposes SB 1316 because it limits the state’s conformity with federal tax law relating to 1031 exchanges. If this bill were to pass, tax deferred exchanges - while still allowable under federal law - will not enjoy the same tax deferred treatment for state tax purposes if the property is exchanged for a property outside the borders of California.
Position: Oppose
Status: Senate Revenue and Taxation Committee
3. AB 2492 (Ammiano) Split Roll – Existing property tax law specifies the transfer of ownership of a corporation, partnership, limited liability company, or other legal entity constitutes a change in ownership of the real property owned by that entity, and results in a reassessment. The bill was recently amended to instead trigger reassessment of a commercial property upon the sale or transfer of 100% of the corporation owning the property in any single transaction. C.A.R. opposes AB 2492 because it will create a burdensome reassessment rule on non-residential property and lead to a split tax roll that will exacerbate the already unfortunate trend toward the “fiscalization” of land use decisions.
Position: Oppose
Status: Assembly Appropriations Committee
Property Tax – Virginia Butler, Issue Chair
1. SB 1415 (Walters) Property Tax Portability – Currently, Proposition 60 allows a homeowner 55 years of age or older to transfer, on a one-time basis, their property tax base year value to another home of equal or lesser value within the same county, or to a home located in a county that has adopted an ordinance permitting homeowners to transfer their property tax base year value to that county. Beginning January 1, 2011, this measure would allow senior homeowners who are 65 years of age or older to transfer their property tax base year value to a dwelling located in a different county regardless of the adoption of an ordinance. C.A.R. supports SB 1430 because it protects seniors who are often on a fixed and/or limited income from property tax increases that can occur when moving to a new home.
Position: Support
Status: Senate Revenue and Taxation Committee
2. SB 1430 (Walters) Senior Citizen Property Tax Exemption – Existing property tax law provides for a homeowners' exemption in the amount of $7,000 of the full value of a "dwelling." SB 1430 would increase this exemption to $27,000 for individuals 62 years of age and older and requires county assessors to annually adjust this tax credit by the percentage change in California’s Housing Price Index. Additionally, the existing Personal Income Tax Law authorizes a $120 credit for married couples or heads of households renting a unit whose adjusted gross income is $50,000 or less, and a $60 credit for those renters whose adjusted gross income is $25,000 or less. SB 1430 would increase this credit for senior citizen renters that are 62 years of age or older to $151 for senior citizen couples and $75 for single senior citizen renters. C.A.R. supports SB 1430 because senior citizens are generally on limited fixed incomes and the current $7,000 exemption does little to alleviate the property tax burden that comes with homes that in California generally have assessed values in the hundreds of thousands of dollars.
Position: Support
Status: Senate Revenue and Taxation Committee, Suspense File
Transaction Tax – Phil Schafer, Issue Chair
1. AB 1919 (Davis) Survey Monument Preservation Fund – Existing law allows a county board of supervisors to create a survey monument preservation fund which can be financed by the imposition of a fee of up to $10 to be charged upon the recording of a grant deed. This fee cannot currently be charged on the filing of grant deeds conveying lots created by recorded tract maps. AB 1919 would delete that exemption allowing the $10 “fee” to be charged upon the recording of any grand deed. C.A.R. opposes this “fee” because it is a disguised transfer tax. A “fee” must be related to the services for which the fee is assessed namely, monument preservation. In this case by removing the exemption the fee will be imposed on ALL grant deed recordings and not just those where monument preservation is ongoing and necessary; therefore the “fee” is a tax.
Position: Oppose
Status: Failed Passage on Assembly Floor, granted reconsideration
III. Federal Taxation Issues
A. Discussion/Reporting Items:
Government Finance – Skip Zeleny, Issue Chair
1. “S” Corporate Tax - As a tool to offset the cost of the tax extenders package, Congress is proposing changes to “S” corporations to ensure their owners are paying their fair share of Social Security and Medicare taxes. Specifically, the proposal is intended to prevent “S” corporation owners from paying themselves exceedingly small salaries (which are taxed for Social Security and Medicare) and take additional proceeds by methods that are exempt from employment taxes. The provision would address the perceived abuses above in situations where 1) an “S” corporation is engaged in a professional service business that is principally based on the reputation and skill of 3 or fewer individuals or 2) an “S” corporation that is a partner in a professional service business.
2. Bush Tax Cuts & Estate Tax - Congress is facing a slew of expiring tax breaks in 2010. These tax breaks include: the expiring Bush income tax cuts, the capital gains rate returning to 20%, and the 1-year elimination of the estate tax - with 2011 returning to a $1,000,000 exemption with a 55% tax rate.
Congress is going to be hard pressed to deal with all of these looming tax issues, especially with so many other issues still on their table and 2010 also being an election year. There is a chance that many of these tax breaks for household earning less that $200,000 for individuals or $250,000 for married couples will get temporary or permanent extensions.
Effective in 2010, the estate tax was repealed, but only for 2010. However, in 2011, the estate tax laws will revert to the laws that were in effect on June 6, 2001.When repeal came into effect, the estate is not taxed, but the basis of assets that heirs receive are "carried over" so that the basis in the hands of the heir is the same as the basis of the previous owner. Any estate tax fix is expected to be retroactive to cover all of 2010.
3. Tax Extenders Package - After passing separate versions of a tax extenders bill (H.R. 4213), the Senate and House would appear to have a draft compromise they have come out with at the end of May. H.R. 4213 is an extension till the end of 2010 for what is known as the annual “Tax Extenders”. These taxes and the 1-year extension include:
· The standard deduction for state and local property taxes
· 15-year leasehold improvements
· Contributions of capital gain real property for conservation
purposes
· Brownfield Deduction
In addition to the “S” corporation offset discussed earlier in this agenda, Congress in proposing a change in the taxing of carried interest. Currently carried interest is taxed at the capital gains rates. The proposed change would allow carried interest to remain unchanged if it reflects a return on invested capital; however, to the extent that carried interest does not reflect a return on invested capital (e.g. sweat equity) the provision would treat seventy-five percent of the remaining carried interest as ordinary income.
As of the posting of this agenda, it remains unclear if Congress will accept the draft compromise or if additional changes, including additional revenue raisers, is required.
Commercial Investment – David Zigal, Issue Chair
1. Unearned Income Medicare Tax - There has been some confusion about a provision in the recently passed health care reform bill that creates a 3.8 percent Medicare tax on unearned income for high-income households. A recent newspaper article in the Spokane, Wash.-based Spokesman-Review made its way around the Internet defining the new tax as a “tax on home sales.” The article did not present a full and detailed explanation of the specifics of the new provision and what it does and does not do.
The new Medicare tax is for all unearned net investment income and includes interest income, dividends, rents, and capital gains. The new Medicare tax will not impact the capital gains exclusion for principal residences ($250,000 for individuals/$500,000 for married couples). The 3.8 percent tax only will apply to taxable gains above this exclusion. The tax will take effect on Jan. 1, 2013, and will be applicable to high-income taxpayers with adjusted gross incomes of $200,000 or more for individuals, or $250,000 or more for married couples.
Additional information is available here.
IV. Other Business
V. Adjournment
