Thursday, May 3, 2012 1:10 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: Ted Loring, Chair Hal Alpert, Vice-Chair
Issue Chairs: Judy Ellis, Transaction Tax J. Michael Roberts, Government Finance Scott Swendiman, Commercial Investment Heide Wolf-Reid, Property Tax
C.A.R. Staff: Christopher Carlisle, Legislative Advocate Matt Roberts, Federal Government Affairs Manager
I. Welcome and Opening Comments - Ted Loring, Chair
II. State Taxation Issues
A. Discussion/Reporting Items:
1. Transaction Tax - Judy Ellis, Issue Chair
a. AB 2225 (Perea) Debt Forgiveness - 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. Also in 2008, California enacted and C.A.R. supported SB 1055 (Machado) which provided conformity with the federal statute for the 2007 and 2008 tax years and, in 2010, C.A.R. supported and California enacted SB 401 (Wolk) which extended the income tax debt forgiveness until December 31, 2012, conforming California to existing federal law. C.A.R.is sponsoring AB 2225 as a state legislation placeholder with which to extend California’s existing mortgage income debt forgiveness sunset date to conform to federal law if the federal government extends their mortgage debt forgiveness sunset date this year.
Status: Assembly Revenue and Taxation Committee Position: Sponsor
b. Recording Fees
1. AB 1950 (Davis) - Existing law allows a local government to adopt a real estate document recording fee of up to $3 to fund the Real Estate Fraud Prosecution Trust Fund. AB 1950 would impose a $25 fee on the recording of any notice of default to fund the Attorney General’s real estate fraud prosecution efforts. C.A.R. sought and reached agreement on amendments to clarify that this fee cannot be applied to documents recorded in connection with the sale or transfer of property. With these amendments C.A.R. will move to a Watch position.
Status: Assembly Public Safety Committee Position: Oppose Unless Amended pending amendments then Watch
2. SB 1220 (DeSaulnier) - As introduced, SB 1220 proposed to provide funding for affordable housing by requiring payment of a $75 per document recording fee on every real estate-related document recorded. Typically, it is necessary to record at least three documents in a real estate sales transaction, so SB 1220 would have increased the cost of every real estate transfer by $225. CAR was opposed to this measure as it added an additional financial burden to all home sales transactions and placed the entire responsibility for funding California’s affordable housing and shelters needs on those who sell, purchase or transfer real property rather than on society as a whole. C.A.R. would not object to alternative funding sources that would spread California’s affordable housing and shelters needs responsibility over a broad base (e.g., sales or income tax). C.A.R. was able to get amendments to SB 1220 that exempt all property sales/transfers from the $75 fee. With these amendments C.A.R. will move to a Support position.
Status: Senate Transportation and Housing Committee Position: Oppose Unless Amended pending amendments then Support
3. SB 1342 (Emmerson) - Currently, a county board of supervisors can adopt a recording fee on a real estate document of up to $3 to fund the Real Estate Fraud Prosecution Trust Fund. These funds will be utilized to enhance the capacity of local policy and prosecutors to deter, investigate and prosecute real estate fraud crimes. SB 1342 would increase the recording fee cap to $10 and expand the definition of what constitutes a "real estate instrument" to include real estate-related documents not already subject to a transfer tax. C.A.R. sought and received amendments to SB 1342 clarifying that the fee cannot be applied to documents recorded in connection with a sale or transfer. With these amendments C.A.R. will move to a Support position.
Status: Senate Governance and Finance Committee Position: Oppose Unless Amended pending amendments then Support
c. AB 1963 (Huber) Service Tax - Under current law a minimum state sales tax of 6.25% is charged on the sale of tangible personal property. AB 1963 proposes to, among other things, lower the existing sales tax to 4% and to extend the 4% tax to all services except: necessary medical services; education; automotive repair; tax preparation and filing; licensed legal services; and services related to agriculture or livestock. These taxes would go into effect on or after January 1, 2013. C.A.R. is opposed to service taxes on real estate related services as they disproportionally burden real estate transactions and homeownership. C.A.R had been seeking amendments to AB 1963 to exempt services related to real estate from the measure; however, the author recently announced that she is going to amend this measure to, instead, direct the Legislative Analyst’s Office to study whether extending the sales tax to services will stabilize tax revenues.
Status: Assembly Revenue and Taxation Committee Position: Oppose Unless Amended pending amendments then Watch
2. Government Finance - J. Michael Roberts, Issue Chair
a. Fire Prevention Fee
1. AB 1506 (Jeffries) - The passage of AB 29 (Blumenfield) of the First Extraordinary Session as a budget trailer bill in 2011, required the State Board of Forestry and Fire Prevention, before September 1, 2011, to establish regulations instituting a fire prevention fee not to exceed $150 on structures located in State Responsibility Areas to supplement the State Responsibility Area Fire Prevention Fund. The State Board of Forestry and Fire Prevention’s initially enacted regulations imposing a base yearly fee of $70 with an additional $20 for structures in a high or very high Fire Hazard Severity Zone, and $25 for each additional dwelling. Due to a number of exemptions provided within the regulations the average resident would have paid about $25 with some paying as low as $5. This fee schedule was revisited a few months later by the Board and the base fee was raised to $150 with exemptions bringing the average resident’s payment to $115. AB 1506 would repeal the fire prevention fee. C.A.R. is supporting this measure as many homeowners will be forced to pay twice for fire prevention as they already reside in fire prevention districts and pay fire prevention fees associated with those districts.
Status: Assembly Appropriations Committee Position: Support
2. AB 2474 (Chesbro) - This measure would specify that an individual who resides in a State Responsibility Area and who pays $150 or more to a local agency that provides fire protection services in the State Responsibility Area is not required to pay the fire prevention fee. Individuals paying less than $150 would receive a credit toward payment of the fire prevention fee equal to the amount paid to the local agency.
b. SB 1168 (Calderon) Homebuyer Tax Credit - SB 1168 creates a homebuyer tax credit for qualified taxpayers who purchase a home between January 1, 2012 and December 31, 2012. The credit will be equal to 5% of the sale price of a home, not to exceed $10,000 and payable 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. This measure will allocate $100 million for qualified first time homebuyers of new or existing homes and $100 million for purchasers of new or previously unoccupied homes. Should the purchaser fail to live in the home for two years, the remainder of the credit payments will be canceled and the purchaser will be required to repay the credit already received. C.A.R. supports this measure which would provide an incentive for first time home buyers to purchase a home as well as encourage purchases of new homes.
Status: Senate Governance and Finance Committee Position: Support
c. Infrastructure Financing/Community Benefit Districts
1. AB 2551 (Hueso) - Under current law cities and counties are authorized to form infrastructure financing districts if the district is approved by two-thirds of the registered voters in the proposed district. AB 2551 would authorize the legislative body of a city or county to create an infrastructure financing district in a renewable energy zone area to promote renewable energy projects without voter approval. C.A.R. is opposed to AB 2551 because it removes the voters’ ability to determine whether an infrastructure district should be formed leaving the taxpayers who would fund the district with no say in whether the district should be created.
Status: Assembly Local Government Committee Position: Oppose Unless Amended
2. SB 949 (Vargas) - Existing law allows local governments to create community benefit districts to finance improvements to property and businesses if that district is approved by two-thirds of the voters living in the proposed district. SB 949 would allow the creation of a community benefit district by a local agency unless the majority of the voters in the proposed district sign a petition stating that they do not want the district created. C.A.R. is opposing this measure because it does not require an affirmative vote to establish the district. If the author incorporated C.A.R.'s suggested amendments that change this requirement to require a two-thirds affirmative vote to create the district, C.A.R. would remove its opposition.
Status: Senate Governance and Finance Committee Position: Oppose Unless Amended
d. Vote Threshold Reductions
1. ACA 21 (Feuer) - Current law requires a two-thirds vote to approve special taxes. ACA 21 proposed to reduce the vote requirement for the imposition of property taxes by a school district, community college district or county office of education to 55%. C.A.R. opposes ACA 21 because property taxes should only be approved by a two-thirds vote, with limited case-by-case exceptions.
Status: Assembly Rules Committee Position: Oppose
2. ACA 23 (Perea) - This bill proposes to 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 23 because special taxes should only be approved by a two-thirds vote, with limited case-by-case exceptions
Status: Assembly Rules Committee Position: Oppose
3. Property Tax - Heide Wolf-Reid, Issue Chair
a. AB 1590 (Campos) Assessment Appeals Boards - The Brown Act requires that local government meetings be properly noticed and prohibits meetings that have not been properly noticed. A 1996 attorney general’s opinion found that local assessment appeals boards are not required to comply with the Brown Act. C.A.R. is sponsoring AB 1590 to clarify that property tax assessment appeals boards are subject to the Brown Act. This legislation also includes provisions specifying that deliberations may be held in closed session.
Status: Assembly Local Government Committee Position: Sponsor
b. Property Tax Deductions
1. Franchise Board Property Tax Deduction Compliance Program - The Franchise Tax Board (FTB) announced late last year that beginning with the 2012 income tax returns, the reporting requirements for property tax deductions would change. At that point, it was generally thought that only ad valorem (in other words, based on the value of the property) taxes could be deducted. Due to the difficulty homeowners would have in knowing which assessments are deductible and which are not deductible, C.A.R. joined a coalition effort to delay implementation of the FTB compliance program. In April, the IRS released Information Letter 2012-0018, stating that there is no statutory requirement that a real property tax be an ad valorem tax to be deductible. The letter, however, goes on to say that assessments on real property based on anything other than the assessed value of the property are deductible if the assessment is (1) levied for the general public welfare by a proper taxing authority at a like rate on owners of all properties in the taxing authority’s jurisdiction, and (2) not for local benefits (unless for maintenance or interest charges). In the wake of the IRS release of the information letter, the FTB announced it will remove material from its website that limits the deductibility of real property taxes to taxes imposed on an ad valorem basis. Once the IRS forms and instructions are revised, the FTB will provide revised California forms and instructions that are consistent with the revisions made by the IRS. Because homeowners will continue to have difficulty determining what is and what is not deductible, C.A.R. will continue its coalition efforts to delay implementation of the compliance program. Ideally, homeowners’ property tax bills will indicate which assessments are deductible and those that are not.
2. AB 1552 (Silva) - This measure provides that the entire amount paid on the property tax bill is deductible for personal income tax purposes including real property taxes, personal property taxes, special taxes and special assessments.
Status: Assembly Revenue and Taxation Committee Position: Watch
c. AB 1700 (Butler) Change in Ownership of a Co-tenancy Interest - Under existing law, when real property changes ownership, it prompts a reassessment of the property taxes. AB 1700 would provide that a “change in ownership” reassessment is not triggered when one co-owner of a principal residence dies and his or her interest in the property is transferred to the other owner. C.A.R. is supporting this measure as it will protect the surviving co-owner from reassessment when a co-owner dies.
Status: Assembly Revenue and Taxation Committee Position: Support
4. Commercial Investment - Scott Swendiman, Issue Chair
a. Nonresidential Building Energy Use Disclosure Program: Implementation of AB 1103 (Saldana, 2007) - The proposed regulations require utilities serving the building to release 12 months of energy use data for the entire building to an owner’s U.S. Environmental Protection Agency (EPA) Portfolio Manager Account. Owners of nonresidential buildings are required, in advance of the sale, lease, or financing of the entire building, to benchmark the building’s energy use using the U.S. EPA’s Portfolio Manager System and to disclose the building’s energy usage to potential buyers, lessees, and lenders.
The regulation contains an implementation schedule based on building size and requires non-residential building owners to open an account at the EPA’s ENERGY STAR® program Portfolio Manager website at least 30 days before a building’s energy use disclosure is required.
The schedule for implementation is as follows: 1. January 1, 2013: Buildings with a total floor area measuring more than 50,000 square feet. 2. July 1, 2013: Buildings with a total floor are measuring more than 10,000 square feet. 3. January 1, 2014: Buildings with a total floor area measuring at least 5,000 square feet.
C.A.R. has participated as a stakeholder in the development of these regulations and sought to ensure that the regulations requirements are workable and do not increase owner liability.
Status: Pending adoption by Commission - 45 Day language to be considered and possibly adopted by the Commission on May 9, 2012
III. Federal Taxation Issues A. Action Items 1. Use of Retirement Funds for Home Purchase (see issues briefing paper) Current tax law allows for the early withdrawal of retirement funds penaltly free for the purchase of a home in certain circumstances.
B. Report & Discussions Items 1. Commercial Investment
a. Commercial Asset Rating Program (see issues briefing paper) The federal government continues to look at possible ways to implement an asset rating program.
b. FASB Lease Accounting Standards On July 21, 2011, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced that they would re-expose proposed new lease accounting rules for public comment. NAR was among the many organizations that called for re-exposure of the rules due to changes in the most recent draft that would force businesses to bring leased assets onto their books as liabilities.
FASB is expected to release their new proposal sometime in the first half of 2012 that takes into account the more than 800 comments to their first proposal. The new proposal is expected to be better than the first, but may not address all the concerns REALTORS® had. NAR is continuing to meet on a regular basis with FASB and the IASB to express REALTORS®’ concerns.
On March 28, 2012, the U.S. House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises held a hearing on “Accounting and Auditing Oversight: Pending Proposals and Emerging Issues Confronting Regulators, Standard Setters and the Economy.” While the hearing was primarily focused on mandatory rotation or “term limits” for audit firms, Rep. Schweikert (R-AZ) raised several questions and concerns regarding the unintended negative economic impact of the Financial Accounting Standards Board’s (FASB) lease accounting proposal. Among other things, this proposal may jeopardize income property fundamentals, loan structures, property valuations, financing covenants, and the underlying economics of commercial real estate.
The FASB Chairman, Leslie Seidman, acknowledged some concerns amongst the business community with the current lease proposal. Furthermore, she told the Subcommittee that the FASB is still working through comments letters and plans to “re-expose” or reintroduce their lease proposal, but did not give a specific timeline.
c. Environmental Protection Agency CO2 Ruling The U.S. Environmental Protection Agency has announced that they will keep greenhouse gas permitting thresholds at current levels. This guarantees that only the largest emitters of CO2, such as coal-fired power plants, will be required to obtain permits. This action is part of EPA's phased-in approach to greenhouse gas permitting under the Clean Air Act. In previous comment letters to the EPA on this issue, NAR recommended that the Agency not move forward with lowering the permitting thresholds, because of the fact that large office and apartment buildings could be included and be required to obtain a permit to emit CO2, which would have a detrimental impact on commercial real estate markets and economic development.
Currently, new and existing facilities that release at least 100,000 tons of CO2 are required to obtain an emissions permit. After evaluating the progress of this permitting program, EPA believes that it would not be feasible from an administrative perspective to lower the thresholds and bring in smaller sources of CO2 emissions because doing so would overwhelm state permitting authorities.
2. Transaction Tax
a. Private Transfer Fee The Federal Housing Finance Agency (FHFA) released their long awaited final rule on private transfer fees (PTF). The final rule is not substantively different than the proposed rule; however, it does include minor changes advocated for by C.A.R. FHFA removed the 1,000 yard requirement under the direct benefits section of the rule and instead offers a two-tier test. First, fees can be a direct benefit if property is open to the general public and is directly adjacent to the burdened community. Second, transfer fees may apply to more distant properties if said properties are primarily for the benefit of the burdened community. The rule also grandfathers in PTF that were created prior to February 8, 2011.
C.A.R. opposes private transfer fees and has continuously advocated they be prohibited. In a series of letters to FHFA, C.A.R. argued that private transfer fees increase the cost of homeownership and do little more than generate revenue for developers, investors, and environmental groups and typically provide no benefit to homebuyers.
b. Federal Tax Issues Update: Linda Goold, NAR Tax Counsel IV. Other Business