Sheraton Grand Hotel
Hendricks/Kamilos/Baker Rooms
Sacramento, Ca
Thursday, June 5, 2008
8:30 a.m. -
11:00 a.m.
Presiding:
Skip Zeleny,
Chair
Cynthia Carley, Vice-Chair
Karl Lee, Vice-Chair
Malcolm Bennett, Executive Committee
Liaison
Susan
Tilling, NAR Committee
Representative
CAR Staff:
Christopher
Carlisle, Legislative
Advocate
Jeff
Keller, Public
Policy
Analyst
I.
Opening Comments
II.
State Taxation Issues
A. Discussion/Reporting Items:
1. Property Tax Basis
Portability
a.
Property Tax Basis Portability Task Force -
Whether property tax basis portability can be
expanded depends on what - if anything - it will cost government in
lost property tax revenues. If there are significant losses, any
proposed expansion of portability will be vehemently opposed. An
analysis of property transactions conducted under the auspices of the
C.A.R. Research and Economics Department revealed that property tax basis
portability can be revenue positive if it triggers additional transactions
that would otherwise not have occurred.
The task force has been working
for the last several months on formulating a survey instrument that will
provide the information needed to determine what changes are needed to
increase the use among homeowners of property tax basis portability.
The survey is planned to be "put into the field" in May with preliminary
results possibly available by the June C.A.R. meeting in Sacramento.
b. AB 2579 (Niello)
Property Tax Base Year Value Transfer Claimants -
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 their property tax base
year value to another home if one of the spouses qualifies for the benefit;
however, the non-qualifying spouse forevermore losses their ability to
transfer the property tax base year value to a home they own to another
home. AB 2579 addresses this inequity by amending the existing statute so
that the non-qualifying spouse is not considered a "claimant" of the
Proposition 60 benefit. C.A.R. supports the additional clarification
because seniors are often on fixed and/or limited incomes and cannot afford
increases in property taxes. Additionally, a divorce for example can wreak
havoc with an individual's finances and that should not be compounded by a
statute that penalizes the spouse that has not independently transferred
the property tax base year value of a home they own.
Position: Support
Status:
Assembly Appropriations
Committee Suspense File
c. SB 1610 (Dutton)
Transfer of Basis to a 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. SB 1610 would allow senior homeowners to transfer their
property tax base year value to a home of greater value. The
measure would eliminate the fiscal impact to government by adding the
difference in the values between the original and new homes to the base
year value. C.A.R. supports SB 1610 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
d. SCA 24 (Dutton)
Transfer of Basis to a More Expensive Home -
This measure, subject to a vote of the
electorate, would amend the state constitution to authorize the adoption of
legislation of the type contained in SB 1610 (see above)
Position: Support
Status: Senate Revenue and Taxation Committee
2.
Private Transfer Tax Task Force
- The
task force's first meeting is scheduled for Tuesday, June 3, to discuss the
work of the task force and consider the draft mission statement. In
addition, the task force will review the work of the first task force on
private transfer taxes (PTTs) - and, in particular, the problems associated
with PTTs identified by that task force - whose ultimate recommendation was
to prohibit the imposition of PTTs. The task force will also discuss
potential statutory schemes that can be used to address the problems
associated with PTTs and/or to limit the imposition of PTTs.
3.
Cancellation of Mortgage
Indebtedness
a.
AB 1918 (Niello) -
Recently, the federal
government enacted the Mortgage Debt Relief Act of 2007 which permits 3
years of mortgage debt relief by not requiring borrowers to pay income tax
on debt forgiven in a "short" sale. This statute will apply to tax years
from January 1, 2007 through January 1, 2010. C.A.R. supports AB 1918
because it provides the same three years of debt relief that the federal
statute allows.
Position:
Support
Status:
Assembly Revenue and Taxation
Committee Suspense File
b. SB 1055 (Machado)
-
Recently, the federal
government enacted the Mortgage Debt Relief Act of 2007 that permits 3
years of mortgage debt relief by not requiring borrowers to pay income tax
on debt forgiven in a "short" sale. This statute will apply to tax years
from January 1, 2007 through January 1, 2010. SB 1055 would provide limited
conformity to federal income tax laws by mortgage debt relief only for tax
years 2007 and 2008. C.A.R. will support SB 1055 if it is amended to
provide the same 3-year of debt relief that the federal statute
allows.
Position:
Support if Amended
Status:
Assembly Revenue and Taxation
Committee Suspense File
4.
1031 Exchanges
a.
SB 1007 (Machado) Exchange Facilitators, Financial Protections
-
Currently, 1031 exchange
facilitators are largely unregulated at both the state and federal levels
of government. SB 1007 would require exchange facilitators to maintain
either a minimum of a $1 million fidelity bond or deposit a minimum of $1
million cash, securities or irrevocable letters of credit in an
interest-bearing account. The bill would require all exchange funds be
deposited in a qualified escrow account or qualified trust that would
permit withdrawals from that account only upon written authorization.
Additionally, since exchange facilitators act as a custodian for all
exchange funds they will be required to invest those funds in investments
that meet a prudent person standard that satisfies the investment goals of
liquidity and preservation of principal. Finally, SB 1007 permits exchange
facilitator clients to file a civil claim on the facilitator bonds,
deposits, or letters of credit if the exchange accommodator fails to
fulfill their contractual duties. C.A.R. supports SB 1007 because it not
only provides necessary regulation to an industry that has been largely
unregulated, but will serve to protect consumers who are conducting 1031
exchanges.
Position:
Support
Status:
Assembly Banking and Finance
Committee
b. Elimination of
Exclusion for Out-of-State Exchanges Proposed
- In
February, the Legislative Analyst's Office (LAO) proposed that the income
tax exclusion for capital gains on 1031 exchanges involving out-of-state
property be eliminated. According to the LAO, "[s]ubsequent sales of
out-of-state property, which ought to trigger deferred capital gains taxes,
are rarely, if ever, reported to California... Given the
administrative difficulty in taxing these gains once the exchange involves
an out-of-state property, we recommend that existing law be amended to
capture these gains." However, no legislation has been introduced to
date containing the LAO's recommendation.
5. SCA 17 (Simitian) Vote
Threshold Reduction for Parcel Taxes -
This measure would allow school
districts to impose unlimited parcel taxes on real property by a 55% vote,
rather than the current 2/3 vote threshold. C.A.R. opposes SCA 17
because parcel taxes are not limited to facility construction, can be
imposed indefinitely, and are a "flat fee" per parcel that place an
additional burden on homeowners.
Position:
Oppose
Status:
Senate Revenue and Taxation
Committee
6. AB 2705 (Jones)
Mello-Roos District Funding of Transit Services -
The Mello-Roos Community Facilities Act
authorizes the establishment of community facilities districts and the
levying of special taxes to finance provision of several services,
including police protection, flood and storm management, fire protection,
etc. This bill would add public transit services to the types of services
that may be financed using Mello-Roos. C.A.R. will oppose AB 2705 until it
is amended to add the same additional vote now required by the Mello-Roos
statute for funding the non-public safety related services that can be
funded by a Mello-Roos district. Almost all of the services that can
now be funded by a Mello-Roos district are public safety oriented and do
not require a separate vote to be funded; the exceptions, such as
recreational services, must be approved by a separate vote.
Consequently, the same separate vote now required for funding non-public
safety services should also apply to transit services.
Position:
Oppose Unless Amended
Status:
Assembly Floor
7.
Taxation
Proposals
a.
Extension of Sales Tax to Services Proposed -
On May 1, Board of Equalization
Chair Judy Chu proposed that the state's sale tax be extended to
services. Given the state budget deficit of $20 billion, she argued
that such a change needs to be made because an increasing percentage of
Californians' income goes toward services. The sales tax constituted
37 percent of general fund revenue in 1980 while now it accounts for only
28
percent.
b. Commission to Review Tax Code Proposed -
On May 6, incoming Assembly
Speaker Karen Bass proposed that a bipartisan commission be established to
make recommendations on changes to the tax code. She stated, "I want
to set up a commission outside of the Legislature that will look at more
long-term solutions and evaluate whether the tax structure we have now
makes sense given that it was devised in the 1930s when we had an entirely
different economy." The issues the commission would look into include
increasing income taxes on the wealthy, extending the sales tax to services
and closing or eliminating "tax loopholes" that decrease tax
revenues.
III. Federal
Taxation
Issues
A. Discussion/Reporting Items:
1. Housing Tax
Credits
In
April, the Senate passed a housing economic stimulus package of 2008, H.R.
3221. The intent of the package is to help homeowners avoid
foreclosure. In actuality, the bill passed by the Senate would do
little to help individuals avoid foreclosure. The final bill was full
of tax incentives directed towards lenders and homebuilders, along with FHA
reform that would severely cut the current higher loan limits implemented
under the first stimulus package, from $729,750 to $550,000. The tax
provisions in the Senate bill include:
The House has amended the Senate housing stimulus package with their owner
version. The House version of tax provisions
includes:
Additionally, the same FIRPTA amendment has
been added to H.R. 3221, the "American Housing Rescue and Foreclosure
Prevention Act of 2008." H.R. 3221 was passed by the Senate on April
10, 2008 by a vote of 84-12 and then amended and passed by the House on May
8, 2008, where the FIRPTA amendment was added.
5. Tenants in Common
Tenant in
Common is a form of co-ownership in real estate which, due to a 2002 IRS
ruling, have increasingly been sold as private placement securities
offerings. In 2002, the IRS provided guidance on how the TIC ownership
structure, which is often used by sponsors to attract investors to own a
partial interest in real property, may be used in section 1031 tax deferred
like kind exchanges. Those TICs sold as securities generally meet the
Supreme Court's definition of an investment contract. Though TIC securities
are real estate, securities laws and regulations prohibit securities broker
dealers from either directly or indirectly compensating non broker
dealers.
There are
currently attempts to work with the SEC on defining a role for real estate
professionals in the brokerage of securitized TIC interests, whereby they
can provide real estate services and derive compensation. NAR is
currently in negotiations with the SEC concerning REALTORS® roles in
securitized TICs. At this moment, they are unable to put many details
on paper due to the changing and confidential nature of the
negotiations. However, if there are any questions, you can contact
Lisa Brechtel at NAR. You can contact her by phone, 202-383-1090, or
email at
LBretchel@realtors.org
6. 1031
Exchanges
In the Senate version of
the Farm Bill, H.R. 2419, there was a provision
concerning like kind exchanges of agricultural property for
non-agricultural property. This provision changes the current 1031
exchange rules and disallows an exchange of "improved real property" for
"unimproved agricultural real property."
However, this provision was not included
in the House version, or the final conference version of H.R.
2419.
7. Vacation Home Safe
Harbor
In March 2008 the IRS released a Revenue Procedure concerning the
involvement of 1031 exchanges and vacation homes. Revenue Procedures
lay out what the taxpayer must to do receive a certain result from the
IRS - in this case what needs to be done in order for the IRS to NOT
dispute the investment nature of a taxpayer's vacation home. This
ruling was prompted by a decision last year in the U.S. Tax Court that
disallowed a taxpayer's exchange from one vacation home to another;
prompting the question of what has to be done to qualify a vacation home
for a 1031 exchange.
First, there
is a 24-month holding period whether the old property is a vacation home,
the new property is going to be a vacation home, or if moving from one
vacation home to another. For each 12-month block during this period
you must have rented the vacation home for at least 14 days at a fair
market rent and the owner cannot use the property for the greater of 14
days or 10% of the days rented during each 12 month
block.
T
his is a safe harbor ruling, meaning that if you can meet
these requirements your exchange should not be challenged. If you do
not meet this test your exchange is not immediately denied. However,
if you do not meet these requirements your exchange will likely been
scrutinized and possibly denied.
8. Qualified Veteran Mortgage
Bonds
C.A.R. Policy:
C.A.R.
supports eliminating the pre-1977 service requirement for QVMB
eligibility.
As home
prices have risen in California, only a few select veterans in California
and four other states have benefited from low-interest rate mortgages
secured by Qualified Veterans' Mortgage Bonds (QVMB). The bonds are
tax exempt government obligations and are backed by the full faith and
credit of the issuing state. Veterans who finance their homes through
QVMBs can receive an interest rate of .50-.75 percentage points less than
that of a conventional loan.
Under current law,
to qualify for a QVMB a veteran must have served on active duty prior to
January 1, 1977 and applied for financing before their thirty-year
anniversary of leaving the service. This prohibits veterans of more
recent or ongoing military conflicts such as Operation Iraqi Freedom,
Operation Enduring Freedom, Kosovo, Somalia, and the 1991 Persian Gulf War
from being able to benefit from these loans.
H.R.
551, the Home Ownership for America's Veterans Act of 2007, was introduced
on January 18, 2007 by Rep. Davis (D-CA). Most of the provisions in
H.R. 551 were rolled in H.R. 3997, the Heroes' Earnings Assistance and
Relief Tax (HEART) Act of 2007. While it did not address every issue
found in H.R. 551, it did include language that would make permanent the
exception that allows QVMBs to be eligible for any housing, not just a
first-time homebuyer, and included the change that instead of having to
serve prior to January 1, 1977, you now would just have to apply for the
QVMB within 25-years of your last date of active duty service. The
Senate passed the latest amended version of H.R. 3997 just prior to the
winter 2007 recess. It was believed that H.R. 3997 would be picked up
again early in the 2nd session of the 110th Congress;
however, so far H.R. 3997 has remained idle in the House.
The House passed H.R. 6081, the "Heroes Earnings Assistance and Relief Tax
Act of 2008" on May 20, 2008 by a vote of 403-0. Included in H.R.
6081 are the same QVMB provisions that were found in H.R.
3997.
9. Carried Interest
C.A.R. Policy: At the October 2007 C.A.R. business
meetings both the Taxation and Federal Issues Committees choose not to take
any action on carried interest.
Under most real estate partnerships when a private
equity partnership is developed there are two categories of
participants. There is the general partner (GP) and the limited
partner(s) (LP). The LPs are the ones who contribute the capital to
fund the projects. The GP either puts up a small (usually 1-2%)
amount of capital, or none, but handles the financial dealings of the
partnership and brings their expertise and experience to the project.
When that property is sold, the profits are divided, primarily among the
LPs. However, there is a common practice in partnerships, including
real estate partnerships, that gives the GP a portion of the profits.
This is separate from his annual management fee which covers his salary and
overhead. This part of the profit is known as carried interest.
The carried interest (which can be up to 20% of the profit from the
investment) is part of the setup of the partnership and is done to give the
GP an incentive to push for the success of the partnership venture and is a
return on their "sweat equity".
The House
has introduced H.R. 2834, which is currently in the House Ways & Means
Committee with 26 cosponsors. H.R. 2834 would eliminate taxing
carried interest at capital gain rates (currently 15%) and instead tax them
at the standard income rates (currently up to 35%). The Senate has
introduced S. 1624, which is currently in the Senate Committee on Finance
with four (4) cosponsors. S. 1624 currently focuses on private equity
groups and does not include real estate carried interest in the language of
the bill, but it is expected that this will be amended in the future to
include real estate and mirror H.R. 2834. This provision has been
discussed numerous times as a tax offset for other bills, including housing
bills and AMT relief.
NAR opposes
any proposal that would eliminate capital gains treatment for any carried
interest of a real estate
partnership.
IV. Other Business
V. Adjournment
