California Homebuyer Tax Credit

A Quick Overview of AB 183 Tax Credit

On March 25th, Gov. Schwarzenegger signed AB 183 Homebuyer Tax Credit into law.  Here’s a quick look:

What Does the Tax Credit do?

• Provides $200,000 000 statewide for a 5% (up to a max of $10,000) credit from the purchase of a home against your California Income Tax.
• The law is a little confusing and I don’t have a complete explanation, but the way it reads:
  • You must purchase a qualified PERSONAL residence between May 1 and December 31, 2010  OR
  • You must purchase a qualified PRINCIPAL residence between December 31, 2010 and August 1, 2011 based on a binding contract signe prior to December 31, 2010.

Who is Eligible?

• First time home buyers    AND
• Any buyer of a new home (never been lived in before).  Most likely, this is “Principal” residence as builders sell new homes well in advance of move-in.

How is this different than the expiring Federal Tax Credit?

• This credit is taken over 3 years rather than all at once like the Federal Credit.
• People who have previously owned a home are not eligible unless they purchase a new home from a builder.

What is the reason for the new credit?  What are they trying to do?

• 40% of first-time home buyers in the past year said they would not have purchased a home without the Federal Tax Credit.
• That credit expires for homes put into escrow afterApril 30th.
• This is an attempt by the state to offset the loss and keep demand strong.
• By applying to two different types of homes, the state is trying to accomplish 2 things:
  • Motivate people to buy new construction which will help support employment and help builders finish projects and avoid financial difficulties which would flow through to the banks which have loaned them money while the recovery is still fragile.
  • Motivate first time buyers who might not otherwise afford a home to purchase a foreclosure and use the tax credit to make repairs – thereby employing people in the services fields (this one seems like a stretch to me as the credit isn’t really enough to fix up a home if it is in bad shape).
• By driving people to action this year, but applying the credit over 3 years, the government gets the added stimulus to the economy now, but spreads the impact of lower tax revenues for the state over 3 years – you know, like when someone else is Gubernor and has to try and balance the budget.

So, is this good?  I think overall it is a good idea as it will help support the real estate market when the federal credit ends.  Since I think the recovery is very fragile, the support is a good idea.   If all the homes purchased maximize the $10k credit, 20,000 buyers will benefit.   I am concerned at the large number of vacant homes that are going through foreclosure.  When these hit the market, I think the market will soften and if that does happen, my hope is the 20,000 buyers purchase those homes, because if we spur the building of a lot of new homes with this bill and then the vacant homes come on the market, we could end up with more homes than buyers again.  However, I understand the goal, and think it is a good try.

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