Thursday, January 19, 2012 1:00 p.m. - 2:50 p.m. Indian Wells
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 392 (Alejo) Posting of Staff Reports - The Brown Act currently requires local government entities to post their agendas 72 hours in advance of scheduled meetings; however, there is no requirement that staff reports be similarly posted. C.A.R. originally sponsored AB 392 to require all local government entities governed by the Brown Act to post their agendas as well as staff reports relating to agenda items on their website (if they have a website - the measure does not require the establishment of a website) allowing individuals and organizations to more easily track proposed government actions. In 2011 AB 1344 (Feuer), which requires the posting of local government agendas on the internet was signed into law. Due to cost considerations, C.A.R. has approached the author of AB 392 about narrowing the measure to require only cities, counties and school districts to post staff reports, thus removing special districts and eliminating much of the cost that was assigned to the measure.
b. SCA 7 (Yee) Public Meeting Notification - The California Constitution requires that the meetings of public bodies be open to the public. SCA 7 amends the constitution to require public bodies to notify the public about their meetings and the actions they take. C.A.R. supports SCA 7 because it believes that the public has a fundamental right to be informed. By adding this requirement to the constitution, SCA 7 eliminates the state mandate and the reimbursement claims being submitted by local governments to cover the costs of appropriately notifying the public of scheduled meetings and proposed actions. (See also AB 392.)
Status: Assembly Appropriations Committee Position: Support
c. Bill Number to Be Determined, Debt Forgiveness Protection - 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 SB 1055 (Machado) which provided conformity with the federal statute for the 2007 and 2008 tax years and, in 2010, 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.’s Board of Directors voted to sponsor legislation to extend the existing January 1, 2013, mortgage income debt forgiveness sunset date provided that the federal government first extends their mortgage debt forgiveness sunset date which is also set to expire on January 1, 2013. This measure will extend California’s debt forgiveness protection contingent upon Congress extending the federal protection.
Status: Pending Introduction Position: Sponsor
2. Government Finance - J. Michael Roberts, Issue Chair
a. State Budget Update - The 2011-12 State Budget approved in June contained automatic budget reductions if revenues did not meet projections at the end of 2011. In mid-December, Governor Brown announced that the administration expects revenues to fall $2.2 billion short of expectations. As a result, nearly $1 billion in midyear budget cuts will be made including $327 million to K-12 schools, $100 million to both the University of California and California State University systems, and $102 million to community colleges. In addition, In-Home Supportive Services and services for people with developmental disabilities will each be reduced by $100 million and public safety services will be cut by $102 million. The Legislative Analyst estimated in December that the state will face a 2012-13 operating budget shortfall of $9.8 billion.
b. ACA 4 (Blumenfield) Bonded Indebtedness Vote Threshold Reduction - This bill would reduce the vote required to approve bonded indebtedness to fund public improvements and facilities from a two-thirds vote to 55 percent. C.A.R. opposed ACA 4 because special taxes and bonded indebtedness should only be approved by a two-thirds vote, with limited case-by-case exceptions.
1. AB 485 (Ma) Infrastructure Financing - The governing body of a city or county is currently authorized to adopt an infrastructure financing plan, create an infrastructure financing district and issue bonds upon voter approval. This measure would eliminate the voter approval requirement, allowing the legislative body to create the district, adopt the plan and issue bonds by resolution, as well as require that a transit village development district funded by infrastructure financing district bonds use at least 20% of the revenue to increase, improve, preserve and develop the supply of low- and moderate-income housing. C.A.R. is opposed to AB 485 because it removes the voters’ ability to determine whether an infrastructure district should be formed. While C.A.R. supports affordable housing, the landowners who are going to be paying the taxes should not be disenfranchised.
2. AB 910 (Torres) Infrastructure Financing Districts - Under current law cities and counties are authorized to form infrastructure financing districts. This measure would authorize infrastructure financing districts to finance affordable housing and to do so without a public election. C.A.R. is opposed to AB 910 because it removes the voters’ ability to determine whether an infrastructure district should be formed.
Status: Senate Governance and Finance Committee Position: Oppose
3. SB 214 (Wolk) Infrastructure Financing District - Under existing law the legislative body of a city or county is authorized to create an infrastructure financing district and to issue bonds to finance improvements within the district if two-thirds of the voters approve the plan. SB 214 would eliminate the current voter approval needed to establish an infrastructure financing district. C.A.R. is opposed to this measure as it would result in the property owners who would fund the infrastructure financing district through property taxes losing their ability to vote on the establishment of such a district.
a. Bill Number to Be Determined, Property Tax Assessment Appeals Boards - In September, the C.A.R. Board of Directors approved sponsoring legislation to require local tax assessment appeals boards to comply with the same Brown Act open meeting act requirements that apply to other government entities. The measure will include provisions to allow closed meeting deliberations of appeals.
Status: Introduction Pending Position: Sponsor
III. Federal Taxation Issues
A. Commercial Investment
1. Commercial Building Asset Rating Program - The U.S. Department of Energy (DOE or the Department) seeks to develop a voluntary National Asset Rating Program for Commercial Buildings (AR Program). The AR Program would establish an Asset Rating system for commercial buildings based on a national standard and would evaluate the physical characteristics and as-built energy efficiency of these buildings. It would also identify potential energy efficiency improvements. The goal is to facilitate cost-effective investment in energy efficiency and reduce energy use in the commercial building sector.
2. 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.
3. Lead Paint RRP Proposed Rule for Commercial Buildings - To limit exposure of humans, especially children, to lead-based paint hazards, Congress in 1992 enacted the Residential Lead-Based Paint Hazard Reduction Act (Title X of Public Law 102-550). Section 1018 of Title X regulates disclosure of lead-based paint in sales and lease transactions involving pre-1978 residential properties.
The most recent EPA rule in this area regulates the creation of lead hazards during renovation, repair and painting activities in residential property. EPA is requiring contractors and renovators to comply with additional regulatory procedures before, during and after any remodeling or renovation activity to reduce the creation of lead dust. EPA is now beginning to develop proposed regulations that address RRP activities in commercial buildings.
Similar rules for commercial buildings could impose increased regulatory burdens and costs on commercial property managers and Realtors with commercial property management responsibilities.
REALTORS® oppose mandatory testing for lead-based paint tied to the transaction process and supports property condition disclosure and education. NAR also opposed the renovation, repair and painting rule due to its costs and administrative burdens.
The rulemaking process for the proposed commercial RRP rule has just begun. EPA is required by a court settlement to propose a rule regulating RRP activities on the exterior of commercial buildings by December 2011 and finalize this exterior rule by July 2013.
The agency is required to propose a rule that addresses RRP activities for the interior of commercial buildings, but the timing of that proposed interior rule is contingent upon additional research and the collection of scientific information. The EPA may propose a rule for reducing lead hazards inside commercial buildings by December, 2013, with a finalized rule at some point in 2015.
To address these proposed rulemakings, NAR has convened meetings with EPA staff, hired legal counsel to provide strategic advice on how to best have EPA address our concerns, and is working in coalition with other regulated stakeholders to ensure our concerns are heard by EPA and Members of Congress. NAR will also comment on the proposed commercial building RRP exterior rule when it is published in the Federal Register.
B. Transaction Tax
1. 2012 Expiring Tax Provisions - While Congress failed in 2011 to act on any large tax reform or proposals that would overhaul the U.S. Tax Code, or eliminate and/or curtail real estate tax provisions; Congress will be facing in the coming years the expiration of the current income tax rates, other tax rates, implementation of other tax provisions, and a need to increase the debt ceiling. Important tax changes include (compiled by NAR):
• Current income tax rates will go up, • Capital gains rate goes up to 20% from 15%, • Estate tax exclusion reverts to a $1 million exclusion from $5 million, • 3.8% tax on investment income—dividends, capital gains, interest, net rents—goes into effect, • An additional debt ceiling increase will be needed during the first quarter of 2013, • End of marriage penalty relief for people who do not itemize, • End of refundable child credit, • Dividends tax rate reverts to ordinary income treatment, • Mortgage cancellation relief expires, • Alternative Minimum Tax (AMT) sweeps in an additional 25 million taxpayers (mostly in states with high income and/or property tax rates or where taxpayers have large families), • 0.9% tax on earned income
2. NAR Housing Summit Issues (Full Summary) - Late in 2011 NAR held a Housing Summit that brought together legislators, academics, practitioners and other real estate experts to discuss the current and future state of the nation’s housing market. Below are tax issues discussed at the Summit and during NAR’s Federal Taxation Committee’s November Business Meetings in Anaheim. NAR took no policy positions at that time on these issues.
a. HOMEK - Individuals who have access to an IRA, Roth IRA or 401(k) plan would be permitted to allocate up to 50% of their savings in the account to a downpayment account for a first-time homebuyer. Employer matching funds could not be part of the allocation. Withdrawals for the purchase would be penalty-free. They would remain taxable as ordinary income, but the tax rate would be sharply discounted. A lifetime limit of $50,000 for downpayments is imposed
b. Merkley Tax Credit Proposal - Create a permanent $5000 homebuyer tax credit for low- to moderate-income individuals for a first-time purchase. The purchaser would be required to match the credit dollar-for-dollar. Eligible purchasers would be those who will not itemize their taxes.
c. Housing Ownership Voucher - In today’s market, it is often substantially less expensive to own a home than to rent one. This is particularly true in areas where the value of owner-occupied housing has declined. The proposal would convert the rental subsidy to an ownership subsidy where eligible individuals would receive a voucher for the difference between the cost of principal, interest, taxes and a repair fund for a purchased home and 30% of their earnings. A mortgage would guarantee that the costs to the housing authority would remain fixed, thus reducing costs over time. (The proposal assumes that rent expenses will continue to increase over the years, so the present value of the ownership voucher would be less than the present value of a 30-year rental subsidy.) Programs would be administered by local housing authorities under procedures and qualification rules similar to existing Section 8 programs.
d. Penalty-free IRA Withdrawals - Generally, individuals who own Individual Retirement Accounts (IRAs) or Roth IRAs may not make any withdrawal from a retirement account until they have reached age 59 and six months. If funds are withdrawn before age 59 1/2, the withdrawn amounts are taxable in full as ordinary income and a 10% penalty is also imposed on the amount withdrawn. If an individual’s 401(k) plan permits early withdrawals, identical rules apply.
One exception to this rule applies to first-time homebuyers. Under the exception, the purchaser (as well as the purchaser’s parents and grandparents) can make a combined withdrawal of up to $10,000 from retirement accounts in order to make a downpayment on the purchase of a home. The amounts withdrawn continue to be treated as ordinary income and taxed in the year of the withdrawal.
Proposal: Extend this penalty relief to individuals who are in arrears on their mortgage payments so that they can stay in their homes.
3. Private Transfer Fee - The Federal Housing Finance Agency (FHFA) has issued a proposed rule intended to limit the usage of private transfer fees (PTF). This is a follow up to their proposed guideline stating “the Enterprises (Fannie Mae and Freddie Mac) should not purchase or invest in mortgages encumbered by private transfer fee covenants or securities backed by private transfer fee revenue, as such investments would be unsafe and unsound practices and contrary to the public missions of the Enterprises and the Banks.” However, unlike the proposed guidelines, the proposed rule creates many exceptions that would make the final rule ineffective in California.
The proposal creates exceptions for homeowners associations (HOA) and non-profit entities who utilize the money to provide a “direct benefit” to the encumbered property. The FHFA has defined “direct benefit” as:
Direct benefit means that the proceeds of a private transfer fee are used exclusively to support maintenance and improvements to encumbered properties as well as cultural, educational, charitable, recreational, environmental, conservation or other similar activities that benefit exclusively the real property encumbered by the private transfer fee covenants. Such benefit must flow to the encumbered property or the community comprising the encumbered properties and their common areas or to adjacent or contiguous property. A private transfer fee covenant will be deemed to provide a
direct benefit when members of the general public may use the facilities funded by the transfer fees in the burdened community and adjacent or contiguous property only upon payment of a fee, except that de minimis usage may be provided free of charge for use by a charitable or other not-for-profit group.
C.A.R. is strongly opposed to the proposed rule and has met personally with the FHFA and submitted a comment letter expressing our concern, opposition and recommended changes to ensure the implementation of a prohibition on PTFs is done in a manner that benefits California’s housing market.
To date the FHFA has not yet published its final rule on this.(Comment Letter) IV. Other Business