Hyatt Grand Champions
Thursday, Feb. 4, 2010
1 p.m. - 2:50 p.m.
Indian Wells, California

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:
David Zigal, Commercial Investment
Skip Zeleny, Government Finance
Virginia Butler, Property Tax
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
Jeff Keller, Public Policy Analyst

I. Welcome and Opening Comments – Dennis Badagliacco, Chair

Discussion/Reporting Item:
Issue Area Mission Statements – In January 2009, the C.A.R. Board of Directors adopted the recommendations of the Reorganization Task Force that the Committee structure be reorganized into four policy committees and two levels of government committees that will handle the same issues formerly addressed by more than a dozen committees. This resulted in the establishment of the Taxation and Government Finance Committee with original jurisdiction over four issue areas: (1) Commercial Investment, (2) Government Finance, (3) Property Tax, and (4) Transaction Tax. (See Issue Briefing Paper)

II. State Taxation Issues

A. Government Finance - Skip Zeleny, Issue Chair

1. Governor’s Budget - On January 8, Governor Schwarzenegger unveiled his 2010-11 Budget. The administration puts the budget deficit faced by the state at $18.9 billion (a $6.6 billion deficit for 2009-10, and an additional $12.3 billion operating deficit for 2010-11). The Governor called the Legislature into special session to consider his $19.9 billion in solutions to address the budget deficit as well as to establish a $1 billion reserve. The Governor’s Budget relies on receiving federal funding, reducing state spending, and shifting program funds. The Budget contains no new taxes. However, many have deemed receipt of the federal funds as unlikely. In addition, the Governor’s proposed spending cuts are largely in the health and human services areas which the Democratically controlled Legislature will likely resist and respond to with proposals to instead increase revenue to the state.

2. Expansion of DRE “Poison Pill” to Special Funds (Bill Number Pending) - 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.

Status: Pending Introduction

3. Housing Tax Credit Proposals

a. SB 49 (Dutton) Housing Tax Credit - SB 15XX, which was signed into law as part of the "marathon" negotiations on the state budget, created a tax credit for new home purchasers equal to 5% of the sale price of a home, not to exceed $10,000. The credit is only available for the purchase of new, or previously unoccupied, homes between March 1, 2009 and March 1, 2010. The current program authorized by SB 15XX allocated $100 million in state funds to provide these tax credits. By the end of April, more than $40 million of the tax credit funds had been allocated. SB 49 was amended in April to remove the $100 million funding cap for the tax credits for homes purchased prior to December 1, 2010. C.A.R. supports SB 49 because the revisions to the current state housing tax credit will further assist the recovery of California's housing economy.

Position: Support
Status: Senate Revenue and Taxation Committee

b. SB 206 (Dutton) REO Homebuyer Tax Credit - C.A.R. is sponsoring SB 206, which as introduced, would have, like federal law, created a first-time homebuyer's tax credit, equal to 10% of the sale price of a home, not to exceed $8,000, for homes purchased as the principal residence of the taxpayer. Due to the state's fiscal crisis, C.A.R.'s Board of Directors at its June 2009 meeting decided to limit this proposed tax credit to REO properties purchased as a principal residence by homebuyers whose individual income does not exceed $95,000, and married couples whose combined income does not exceed $170,000. The bill will be effective for one year from the date of its enactment. SB 206 was amended to utilize a funding source from federal stimulus funds instead of the state general fund. Unfortunately, this source proved to be unavailable for tax credit purposes. Efforts are continuing to locate a funding source for this tax credit that does not burden the state's general fund during these tight fiscal times.

Status: Senate Revenue and Taxation Committee

c. AB 765 (Caballero) Housing Tax Credit - SB 15XX, which was signed into law as part of the "marathon" negotiations on the state budget last February, created a tax credit for new home purchasers equal to 5% of the sale price of a home, not to exceed $10,000. The credit is only available for completed purchases of new (previously unoccupied) homes between March 1, 2009, and March 1, 2010. The current program authorized by SB 15XX allocated $100 million in state funds to provide these tax credits. As introduced, C.A.R. supported AB 765 which would have removed the tax credit funding cap for homes purchased prior to December 1, 2010. As amended in June, however, AB 765 does not eliminate the $100 million cap, given the state budget shortfall, but rather changes the eligibility criteria for the tax credit by requiring purchasers to execute an enforceable contract by March 1, 2010 and to close escrow before December 1, 2010. The bill was further amended to revise the Franchise Tax Board (FTB) process for calculating the number of tax credits available. For each certification received from a seller, FTB is required to reduce the total amount of credit available for allocation by an amount equal to 70% of the credit allocated to a taxpayer. C.A.R. supports AB 765 because it will allow approximately 5,000 more home buyers to access this tax credit.

Position: Support
Status: Senate Floor

d. AB 902 (Torres) Foreclosed Homes Income Tax Credit - AB 902 would grant purchasers of foreclosed homes, whose annual gross income is no more than 120% of the area's median income, a tax credit equal to two percent of the cost of the home up to $3,000. The credit will be available to buyers purchasing the foreclosed property as a principal residence if the purchase is made after January 1, 2009, and before January 1, 2012. Unfortunately, AB 902 was amended in May to fund this tax credit by repealing mortgage interest deductions for second homes from January 1, 2010, through January 1, 2012. C.A.R. will oppose AB 902 unless it is amended to utilize an alternative funding source.

Position: Oppose Unless Amended
Status: Assembly Revenue and Taxation Committee

4. Vote Reduction Proposals

a. SCA 6 (Simitian) Vote Threshold Reduction for Parcel Taxes - This measure would reduce the vote required for a school district to impose a parcel tax from two-thirds to 55%. C.A.R. opposes SCA 6 because parcel taxes are not limited to facility construction, can be imposed indefinitely, and are a “flat fee” per parcel that may place an additional burden on homeowners least able to afford it.

Position: Oppose
Status: Senate Floor

b. SCA 12 (Kehoe) Special Tax and Bonded Indebtedness Vote Threshold Reduction - This bill would reduce the vote required to approve special taxes and bonded indebtedness to fund emergency and public safety services, from a two-thirds vote to 55 percent. C.A.R. opposes SCA 12 and argues that California voters have on several occasions clearly stated that special taxes and bonded indebtedness should only be approved by a two-thirds vote and that the higher standard that a two-thirds vote reflects the public’s view that the imposition of special taxes and bonded indebtedness should held to that standard.

Position: Oppose
Status: Senate Floor

c. ACA 9 (Huffman) Property Tax and Special Tax Vote Threshold Reduction - Proposition 13, which was approved by the voters in 1978, prohibits property taxes from exceeding 1% of the full cash value of the property. Current law also requires a two-thirds vote to approve special taxes. ACA 9 proposes to reduce the vote requirement for the imposition of property taxes and special taxes to 55%. C.A.R. opposes ACA 9 and argues that California voters have on several occasions clearly stated that property taxes and special taxes should only be approved by a two-thirds vote and that the higher standard that a two-thirds vote represents reflects the public’s view that the imposition of special taxes should be held to that standard.

Position: Oppose
Status: Assembly Floor

d. ACA 10 (Torlakson) Education Finance District Special Tax Vote Threshold Reduction - ACA 10 would reduce the vote required to approve special taxes for education finance districts from a two-thirds vote to a simple majority. C.A.R. opposes ACA 10 because it runs counter to the expressed views of California voters who have clearly stated that special taxes should only be approved by a two-thirds vote.

Position: Oppose
Status: Assembly Floor

e. ACA 15 (Arambula) Local Transportation Project Special Tax Vote Threshold Reduction - This bill would reduce the vote required to approve special taxes for local transportation projects, from a two-thirds vote to 55 percent. C.A.R. opposes ACA 15 and argues that California voters have on several occasions clearly stated that special taxes should only be approved by a two-thirds vote, and that the higher standard that a two-thirds vote reflects the public’s view that the imposition of special taxes should held to that standard.

Position: Oppose
Status: Assembly Floor Inactive File

C. Property Tax - Virginia Butler, Issue Chair

1. Proposition 60

a. AB 321 (Niello) Retention of Spouse’s Eligibility Under Proposition 60 - 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. Currently, married homeowners can transfer the property tax base year value of their home to another home based on the qualification of one of the spouses. Unfortunately, the other spouse loses the ability to similarly transfer the base year value of a property. If the two individuals were not married, both individuals would be able to transfer the base year value of their home one time. This measure would preserve the ability of the non-qualifying spouse to subsequently transfer the base year value of that, or another home subsequently owned by that individual. C.A.R. supports AB 321 because it addresses this inequity by proposing to amend the existing statute so that the non-qualifying spouse is not considered a “claimant” of the Proposition 60 benefit.

Position: Support
Status: Assembly Appropriations Committee

b. SB 274/SCA 11 (Dutton) Transfer to More Expensive Home - 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. This measure would allow senior homeowners to transfer their property tax base year value to a more expensive home; however, the difference in value between the original and replacement homes would be added to the base year value, which would eliminate any negative fiscal impacts on government. C.A.R. supports SB 274/SCA 11 because it protects seniors who are often on a fixed and/or limited income from property tax increases that can occur when purchasing a new home.

Position: Support
Status: Senate Revenue and Taxation Committee

2. AB 157 (Anderson) Property Tax Base Year Value Transfers for Disaster Relief - Currently, homeowners whose homes are damaged or destroyed by a disaster are permitted to transfer the property tax base year value of that property to a replacement property of comparable value within five years of the disaster, provided the replacement property is located in the same county as the original property. AB 157 would extend that time period to seven years. C.A.R. supports AB 157 because disputes with home insurers regarding compensation can be extremely protracted in the wake of a disaster. AB 157 recognizes this fact by extending the period for these transfers by an additional two years.

Position: Support
Status: Senate Revenue and Taxation Committee

D. Transaction Tax - Phil Schafer, Issue Chair

1. Debt Forgiveness

a. SB 97 (R. Calderon) Conforms to Original Federal Debt Forgiveness Legislation - The federal government enacted the Mortgage Debt Relief Act of 2007 that permitted 3 years of mortgage debt relief by not requiring borrowers to pay income tax on debt forgiven in a “short” sale. In late 2008 the federal government extended this relief through December 31, 2012. Last year, California enacted SB 1055 which provided conformity with the federal statute for the 2007 and 2008 tax years. SB 97 would fully conform to the federal rule and extend debt forgiveness on "phantom" income through December 31, 2012.

Position: Support
Status: Senate Revenue and Taxation Committee

b. AB 111 (Niello) Cancellation of Mortgage Indebtedness - The federal government enacted the Mortgage Debt Relief Act of 2007 that permitted 3 years of mortgage debt relief by not requiring borrowers to pay income tax on debt forgiven in a “short” sale. In late 2008 the federal government extended this relief through December 31, 2012. Last year, California enacted SB 1055 which provided conformity with the federal statute for the 2007 and 2008 tax years. AB 111 would fully conform to the federal rule and extend debt forgiveness on "phantom" income through December 31, 2012. (see also, SB 97)

Position: Support
Status: Assembly Revenue and Taxation Committee

2. AB 827 (Yamada) Recording Fees to Fund Historical County Records - As introduced, AB 827 would have allowed counties to impose an additional per page recording “fee” of up to $3 for the first page of a document and $1 each for the remaining pages for the archiving of documents of historical interest. AB 827 was amended to instead limit the recording fee to the actual costs of providing archival services up to a maximum of $3 per property-related document. Under state law, a fee can only be charged to cover the cost of providing the service for which the fee is collected. That is not the case here; C.A.R. opposed AB 827 because this “fee” is really a transfer tax. AB 827 also attempts to circumvent the voters’ right to approve local taxes.

Position: Oppose
Status: Senate Floor Inactive File

III. Federal Taxation Issues

A. Commercial Investment - David Zigal, Issue Chair

1. Tax Extenders
On December 9, 2009 the House passed H.R. 4213, by a vote of 241-181. H.R. 4213 is a 1-year extension of 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
· Low-Income Housing Credit

Under the House rules, these extensions had to have offsets. One of the offsets included a change in the taxing of carried interest. Currently carried interest is taxed at capital gains rates, but with the new provision would be taxed at regular income rates, generating revenue of $24.6 billion.

C.A.R. has no policy on carried interest at this time. NAR has policy opposing this change to carried interest.

At this point, the Senate has yet to take up legislation extending the tax provisions. The Senate is expected to take this issue up in early 2010 and make it retroactive to the start of the year; however, in past years there have been disputes as to whether these extenders need to be offset, with the Senate voting not to offset them. Therefore, the carried interest provision could be removed when the Senate addresses the extenders.

B. Government Finance - Skip Zeleny, Issue Chair

1. Homebuyer Tax Credit
The Homebuyer Tax Credit (HTC) was both extended and expanded. The extension applies to the First-time Homebuyer credit, which is now extended until April 30th for a first-time homebuyer to enter into a contract. As long as a contract is entered into by April 30th, the first-time homebuyer will have 60-days (June 30th) to close and still qualify for the credit. Under the new HTC if the home was purchased between November 7, 2009 and April 30, 2010:
-The tax credit is 10% of the purchase price, capped at $8,000.
-The tax credit does not need to be repaid – the only exception being if the property is sold within 3-years of purchase.
-The new income limitations are $125,000/individual and $225,000/filing jointly.
-Dependents are not eligible to claim the tax credit and the purchaser must be at least 18-years-old on the date of purchase.
-The tax credit is not available if the purchase price exceeds $800,000.

The HTC was also expanded to include “Step-up” buyers. These are people who have owned a principle residence for at least five consecutive years of the past eight years. These buyers are eligible for a tax credit of up to $6500 and must meet all of the other qualifications that are included for first-time homebuyers. “Step-up” buyers do not have to sell their current principle residence, but the new home being purchased must become their principle residence for at least three consecutive years.

Additionally, for Military/Foreign Service/Intelligence Personnel:
· If qualifying member has served at least 90 days overseas during the period of December 31, 2008 - May 1, 2010 they receive an extra year to buy a principle residence and qualify for the tax credit.
· Qualifying members are: members of the uniformed services, members of the Foreign Service and employees of the intelligence community.
· Additionally, qualifying members will have the repayment requirement waived if they sell their home or it stops being their principle residence because they are ordered to serve at least 50 miles away from their principle residence (whether inside the U.S. or overseas) for at least 90 days.

More information on the HTC can be found at:

C.A.R. Matrix
IRS HTC Page

2. Expiring Tax Breaks
Congress is going to face a slew of expiring tax breaks in 2010. These tax breaks include: the expiring Bush income tax cuts, the capital gains rate possibly returning to 20%. In addition to these expiring tax breaks, there are going to have to be other tax breaks looked at in order to offset some of the spending that has been incurred in 2009.

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.

C. Property Tax - Virginia Butler, Issue Chair

1. Estate Tax
The Economic Growth and Tax Reconciliation Act of 2001 set in motion a ten-year plan to increase the exemptions from the estate tax and lead to a one-year full repeal in 2010; however, in 2011, the estate tax laws would revert to the laws that were in effect on June 6, 2001.

As under prior law, the basis of assets received between 2001 and 2009 is "stepped up" to its fair market value at the time of death. When repeal comes into effect, the estate will not be taxed, but the basis of assets that heirs receive will be "carried over" so that the basis in the hands of the heir is the same as the basis of the previous owner.

Below is a chart showing the estate tax rates and exemption levels.

On December 3, the House passed H.R. 4154, by a vote of 225-200, which would have permanently extended the 2009 exemption and tax rate; however, the Senate has yet to take up estate tax legislation. Therefore, as of the time of this writing, the estate tax is repealed for 2010 but is now “carried over”. Congress is expected to finalize estate tax legislation in early 2010 and make it retroactive to the start of the year. Whether it will be a one-year, short fix, or permanent fix though has yet to be determined.

2. Mortgage Interest Deduction
The Congressional Budget Office (CBO) prepared a report that suggests ways for Congress to raise revenues. One key suggestion is that Congress cut the mortgage interest deduction (MID) from the present $1.1 million cap ($1 million for a home and $100,000 for a home equity line of credit) to $500,000, phasing in the reduction by $100,000 annually starting in 2013. This would generate an additional $41 billion in revenue over 10-years.

Another option proposed by the CBO, which we have heard before, would replace the MID with a flat tax credit that is 15% of mortgage interest paid. This would increase revenue by about $390 billion over six-years.

Other proposals include eliminating the deduction for all state and local taxes, including property taxes, which would increase revenues another $862 billion by 2019.

These types of ideas have been floated before and in the past have died quickly because MID has been considered sacred; however, with the current economic climate and the over-extension of housing being seen as one of the causes of the financial turmoil, analyst believe that this might be a year where a change in the mortgage interest deduction could be possible. C.A.R. will monitor and continue to oppose, as our current policy states, any proposals made that would reduce or alter the MID.

IV. Other Business

V. Adjournment