Wednesday, October 15, 2008
2:00 p.m. to 4:00 p.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. Action Items:

1. The Regulation of 1031 Exchange Accommodators: If signed into law by the Governor, SB 1007 (Machado) would provide some protection for real estate investors given the requirement for a $1 million fidelity bond or $1 million in cash, securities or a letter of credit. However, given the tens of millions of dollars involved in the two notorious 1031 exchange accommodator cases that occurred last year, the adequacy of SB 1007’s financial responsibility requirement has rightly been called into question. It may be possible to provide greater regulation of 1031 exchange accommodators by bringing them under California’s Escrow Law. 1031 exchange accommodators appear to be very similar to escrow companies in that they hold funds for the purchase of a property. While the bond amounts that each escrow company must maintain under the state’s Escrow Law are significantly lower than that required of exchange accommodators by SB 1007, membership in the Escrow Agents’ Fidelity Corporation would provide significantly greater financial security for real estate investors.

2. A Review of Vote Thresholds: From time-to-time and, in particular, when the state is experiencing fiscal difficulties, C.A.R. has reviewed the state’s financial and taxation mechanisms in order to be “ahead of the curve” so-to-speak with regard to potential proposed changes to those mechanisms. To date, C.A.R. has maintained a policy that it “should judge proposals on a case-by-case basis, rather than precluding any approaches out of hand.” The vote threshold required for the imposition of taxes or the selling bonds vary from a simple majority to two-thirds; however, education bonds can be approved with a 55 percent vote. One area that may warrant some consideration is that of the vote requirement for general taxes versus specific taxes. An argument could be made that the current vote requirements are backwards. It would seem that if the public is provided with less information about how the tax funds are to be used, then a two-thirds vote should be required for approval. And, in fact, there have been instances in which cities knew the purpose for which the tax funds were going to be used but did not link the tax to the specific purpose in order to avoid the two-thirds vote requirement.

3. Private Transfer Taxes Task Force: Final Report; The task force considered but, ultimately, rejected placing PTTs within the regulation provided by the Mello-Roos law. The task force members were troubled by two aspects of Mello-Roos: (1) unlike current PTTs which are imposed only at point of sale, the Mello-Roos payment obligation is imposed for a number of years and, thus, constitutes an on-going financial obligation, and (2) adding environmental mitigation and/or affordable housing to the list of services/facilities that can be funded via Mello-Roos could open the door to attempts to add other services/facilities that can be funded by Mello-Roos that provide little, if any, benefit to the homeowner. In addition, the task force considered attempting to find a middle ground between the legislative measure to regulate the imposition of PTTs sponsored by C.A.R. and the bill sponsored by the California Building Industry Association. There were some common areas of agreement (for example, that private individuals be prohibited from establishing a PTT payment obligation on their own home) but there were also areas of wide disagreement (the total amount of the PTT payment obligation as a percentage of the home sale price, as well as the number of years over which payment could be required of new owners of the home). Ultimately, the task force decided that any compromise in this area may result in increases in the amount of PTT obligations above that which is currently being seen.

4. Property Tax Basis Portability Task Force: Final Report; In order to help determine the likelihood of success of attempting to expand property tax basis portability, the task force had a survey conducted of longtime homeowners as well as homeowners that had either already qualified or would soon qualify to transfer their property tax basis. The survey measured homeowner awareness of the impact of property taxes on the cost of owning a home as well as awareness of property tax benefits available under Propositions 60 and 90. The survey found that property taxes play a small part in the home buying decision (which may surprise REALTORS® working in the highest cost areas). Additionally, the survey found that awareness of the ability to transfer property tax basis available under Propositions 60 and 90 is extremely low. Ultimately, the task force determined that now is not the right time to consider sponsoring any legislation which would increase the portability of California homeowners’ property tax bases due to the current political and economic realities and to the significant lack of awareness on the part of homeowners as to the provisions and ramifications of Propositions 60 and 90, the task force supports C.A.R. continuing its policy of supporting increases in the use of portability when proposed by other entities.

B. Discussion/Reporting Items:

1. 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. The measure was amended to include a sunset provision that will take affect on January 1, 2014.

Position: Support
Status: Enrolled to the Governor

2. Vote Threshold Reductions

a. SCA 17 (Simitian) Vote Threshold Reduction for Parcel Taxes; This bill would have allowed 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. opposed SCA 17 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. With only 20% of Californians currently able to afford the median priced home, adding another local tax burden on real property is inappropriate.

Position: Oppose
Status: Died in Senate Revenue and Taxation Committee

b. SCA 18 (Torlakson) Education Finance District Vote Threshold Reduction;
SCA 18 would have decreased the vote required for the imposition of a special tax from a two-thirds vote to a simple majority for education finance districts. C.A.R. opposed SCA 18 because California voters have clearly stated that special taxes should only be approved by a two-thirds vote and, given the “voter fatigue” that has occurred in recent elections because of the large number of propositions placed on ballots, issues on which the voters have already clearly spoken should not further clutter already full ballots.

Position: Oppose
Status: Died in Senate Revenue and Taxation Committee

c. SCA 21 (Kehoe) Public Safety Services; This bill would have lowered the vote required for approval of local government special taxes and bonded indebtedness to fund emergency and public safety services and buildings, respectively, from two-thirds to 55 percent. C.A.R. opposed SCA 21 and argued 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 represents reflects the public’s view that the imposition of special taxes should held to a stringent standard.

Position: Oppose
Status: Died Senate Revenue and Taxation Committee

3. Property Tax Base Year Value Transfers

a. 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 addressed this inequity by proposing to amend the existing statute so that the non-qualifying spouse was not considered a “claimant” of the Proposition 60 benefit. C.A.R. supported the additional clarification because seniors are often on fixed and/or limited incomes and cannot afford increases in property taxes. Additionally, a divorce can wreak havoc with in individual’s finances and that should not be compounded by a statute that fails to recognize that marriages don’t always last forever.

Position: Support
Status: Died in the Senate Appropriations Committee

b. SCA 24/SB 1610 (Dutton) Property Tax Base Year Transfers 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 have allowed senior homeowners to transfer their property tax base year value to a home of greater value. The measure would have eliminated 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. supported SB 1610 because it would have protected 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: Died in the Senate Revenue and Taxation Committee

4. 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. As introduced, this bill would have applied to tax years from January 1, 2007 through January 1, 2010. However, the measure was amended to only apply to the 2007 and 2008 tax years. C.A.R. would have supported the measure if it completely conformed to federal law.

Position: Support if Amended
Status: Died in the Assembly Appropriations Committee

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. would have supported 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: Enrolled to the Governor

5. 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 have added public transit services to the types of services that may be financed using Mello-Roos. C.A.R. opposed the passage of AB 2705, and sought amendments to add the same additional vote now required by the Mello-Roos statute for funding recreational services. Arguably, 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 exception is recreational services, the funding of which must be approved by a separate vote. Consequently, the same separate vote now required for funding recreational services should also apply to transit services.

Position: Oppose Unless Amended
Status: Died in the Senate Local Government Committee

III. Federal Taxation Issues

A. Action Items:

1. Federal Tax Policy Review; Any bill that includes changes or additions to the tax code, especially involving real estate, can play a pivotal decision in how people decide to purchase property, both primary residence and second homes/investment properties. C.A.R. follows numerous real estate related tax issues and has taken policies on many of them. Some of these policies have been updated and some have not been changed for years because either the issue has disappeared or because the issue has not changed. On some tax issues, C.A.R. has not taken a policy yet. It was requested by some members of the Taxation Committee that the committee members review our current C.A.R. tax policies and determine if there are any policies that need to be reviewed or updated and to give staff direction on how to proceed on tax issues. Additionally, with some tax issues passed and some new issues arising, there was a sense that the committee should help direct staff on what direction to take certain tax policies. If any revisions or new policies from this review are to be taken, they will be done at the January 2009 meetings. Any decisions on staff direction concerning tax issues will be kept confidential and used only as direction for the staff to use when approaching these issues in legislation.

NOTE: THIS ACTION ITEM WILL BE CONSIDERED AT THE END OF THE COMMITTEE MEETING AND IN CLOSED SESSION.

B. Discussion/Reporting Items:

1. H.R. 3221: The Housing and Economic Recovery Act of 2008

a. Homebuyer Tax Credit
The tax credit only applies to first time homebuyers; defined as a homeowner who has no present ownership in a principle residence or has not had ownership of a principle residence for at least 3-years.

The tax credit is 10% of the purchase price, capped at $7,500. The tax credit is reduced when the buyers adjusted gross income (AGI) is over $75,000 ($150,000 married filing jointly). The amount is reduced by the amount over the allowed AGI divided by $20,000. The tax credit does need to be repaid, therefore working more as an interest free loan than a true tax credit. The credit is repaid out of your taxes over 15-years, or a rate of 6.66% of the credit per year.

If the home is sold before the credit is paid back, payments are accelerated in the following taxable years by the amount still owed on repayment over the original amount of the credit. However, if your gain on the house does not exceed the amount still owed at the time of sale, you will not owe any more repayment on the credit.

The home must be purchased between April 8, 2008 and June 30, 2009.The purchase must be of an owner occupied primary residence. You cannot get the credit is the property is purchased from a relative, the purchase is financed by a tax exempt qualified mortgage issue/bond, the taxpayer is a nonresident alien, or if the taxpayer disposes of the residence before the close of the taxable year.

b. FIRPTA
H.R. 3221 included a reform of the Foreign Investment in Real Property Tax Act (FIRPTA), that C.A.R. has been advocating for, that would allow FIRPTA documents to be held by escrow instead of having to go to the buyer. Sellers had been refusing to provide their Social Security number on the FIRPTA documents, a requirement, due to fear of identity theft.

c. Mortgage Revenue Bonds
Included in H.R. 3221 was an increase in the amount of allowed tax-exempt housing bonds, to $10 billion, and allows the use of the bonds to refinance qualified subprime mortgages (adjustable rate single-family residence made after December 31, 2001 and before January 1, 2008).

d. Community Development Block Grants
H.R. 3221 provided for $4 billion in neighborhood revitalization funds for communities to purchase foreclosed homes in the form of development block grants.

e. Standard Deduction for Property Taxes
Included in H.R. 3221 was the creation of a new standard deduction for property taxes for nonitemizers, capped at $500 ($1000 for joint filer).

f. Second Home Conversion Tax Offset
One of the offsets included in H.R. 3221 was the closing of a tax loophole concerning the conversion of a second home to a primary residence and the capital gains exclusion. This offset ONLY applies when a second home is converted to a primary residence and does not affect the capital gains exclusion when a home has only been a primary residence.

The loophole allowed a second home that was converted to a primary residence and used as such for at least two out of the previous five years to use the $250,000/$500,000 capital gains exclusion. H.R. 3221 closes that loophole and will now only allow the capital gains exclusion to apply to gain received once the house became a primary residence

Any gain earned prior to January 1, 2009 would not be affected by this provision and there are some exclusions of this policy for extended military service (with limitations) as well as change of employment, health conditions or other unforeseen circumstances (not to exceed an aggregate period of two years).

The new formula to calculate the gain allowed to be included in the capital gains exclusion would be: Profit from the sale multiplied by the number of days the home was a primary residence over the number of days the home was owned.

2. Tax Extenders
A temporary rule permitting the cost of leasehold improvements to be recovered over 15-years has been in place since 2004 but expired as of December 31, 2007. Prior to the enactment of this provision, these costs had to be recovered over the 39-year statutory life of the underlying property, even if the lease had a substantially shorter term.

The 15-year leasehold improvement provision is included in the larger tax extenders legislation, H.R. 6049, the “Energy and Tax Extenders Act of 2008” which also includes a deduction for state and local taxes, and Brownfield deductions. There is little to no debate over the merits of these tax extensions; however, there is substantial disagreement between the House and Senate and among the two parties as to whether the extender legislation should be "paid for".

Currently these tax extenders are part of a Senate package that includes energy tax breaks and the AMT patch. The House Democrats, especially the Blue Dog Democrats, want to make sure that the extenders are offset, especially the AMT provisions. Currently, the tax extenders are not fully offset, the energy tax breaks are, and the AMT patch is not offset at all. It appears as if there will be another showdown, with the Senate Republicans refusing to fully offset the extenders and the House Democrats trying to hold to the fiscally responsible PAYGO rules. The real estate tax extension may be caught in this legislative fight and be delayed, especially with this being an election year and the possibility of their being a shift towards even greater Democratic numbers. House Democrats may be willing to punt this issue to the start of the 111th Congress in hopes of have a larger majority and the ability to pass these extenders fully offset.

3. AMT
One of the largest tax debates in the 110th Congress is the one-year patch to the AMT. The main controversy surrounding the issue is offsetting the $64 billion one-year patch. In the first session, Democrats tried a variety of options to find an acceptable offset for the AMT patch in order to keep with PAYGO rules. However, Republicans in the Senate and the President refused to accept any offsets.

In the end, the Democrats decided that it was more important to help keep an extra 20 million Americans out of the AMT and in the waning days before Christmas passed a one-year patch without offsets.

Once again there is an attempt by the Senate Republicans to have the AMT patch not offset. The Senate Democrats have acknowledged that they do not have to votes to offset the AMT patch. The Senate Republicans have attached the AMT patch to the tax extenders an energy tax breaks and have vowed that they all must be passed together, without full offsets.

However, with this being an election year and the possibility of their being a shift towards even greater Democratic numbers, the House Democrats may be willing to punt this issue to the start of the 111th Congress in hopes of have a larger majority and the ability to pass an offset AMT.

4. 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.
Previously, 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. 6081, the “Heroes Earnings Assistance and Relief Tax Act of 2008”, was passed by both the House and Senate and signed into law on June 17, 2008.

H.R. 6081 included 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.

IV. Other Business

V. Adjournment