Archive for March, 2010

March 28, 2010

The California First-Time Buyer Tax Credit is designed to be an economic stimulus plan.  Following is the typical scenario that the State is banking on:

Several years ago, Mark received an inheritance from his grandfather and decided to purchase a two bedroom, one bath condominium for $150,000.  This home served him well, but three years ago he married Jane and last year they had a son.  Suddenly, there is barely room to turn around.  So Mark and Jane have made the decision to buy a larger place.   Little did they know that their move could help stabilize their state’s economy.

Mark and Jane live in California where the first year’s property tax basis is the purchase price due to the infamous Prop. 13.  Thereafter, it goes up only two percent each year.  As time passes, long time owners usually see that they pay substantially lower property taxes than their newer neighbors.  (A declining market may give a temporary retrieve, but that would be another blog.)

In order to purchase a new home, Mark and Jane need to sell their condominium.  Cindy is a first-time buyer.  She falls in love with their home and purchases it for $200,000.  Cindy is excited because she qualifies to receive a tax credit of up to $10,000 for first-time buyers in California that will be spread over three years, or a maximum of $3,333 a year.

Now Mark and Jane are ready to find their new home.  Tom and Patty bought a three bedroom, two bath townhouse ten years ago for $250,000.  Their three children are now all in school so Patty has resumed her career as a nurse.  With the extra paycheck, Tom and Patty want to buy a four-bedroom home with a yard for their dog Scooter.  They are thrilled when Mark and Jane fall in love with their townhome (“It has a garage”) and buy it for $350,000. 

So now Tom and Patty are house hunting.  Their search leads them a lovely four-bedroom home owned by Hal and Sylvia who bought it fifteen years ago for $300,000.  They strike a deal for $500,000 allowing Hal and Sylvia to look for their dream home. 

With a property tax rate at one percent of tax basis (again Prop. 13), these three transactions will increase annual property tax revenues by $3,500, easily covering the annual first-time buyer tax credit and after three years it is all tax revenue.  But let’s take the chain one transaction further.

Hal and Sylvia have spent twenty years building a business from nothing.  Their hard work has paid off and now they want to reward themselves by buying their dream home.  They find a beautiful ranch home on a third acre of land with a three-car garage, RV access, views, and a pool.  They immediately offer Linda, the original owner, $800,000.   She happily accepts it and cashes out to move to Colorado to be close to her son and grandchildren.  She and her recently deceased husband had purchased the place thirty years earlier at $300,000.  This sale is now an additional $5,000 in the state’s coffer. 

Further each of these transactions will also create additional revenue that could be subject to taxation, i.e. sales commissions, escrow fees, title insurance premiums, inspection fees.  However, it is most important for the state to stabilize the property tax base if they are to stabilize our economy.  In the process, California will be helping every one of its homeowners retain value in their homes. 

Buyer  Purchase Price   Tax Basis Before Sale   Increased Tax Basis   Increased Property Taxes 
Cindy   200,000    150,000     50,000         500
Mark & Jane   350,000    250,000   100,000      1,000
Tom & Patty   500,000    300,000   200,000      2,000
Hal & Sylvia   800,000    300,000   500,000      5,000
Increased Property Tax Revenue      8,500
 Rich & Jan McMillen