Real Estate Round-Up: AB 1771, another tax on homeownership

Imagine a 25% tax to sell your home? Assemblymember Christopher M. Ward of California’s 78th District, which is from Solana Beach to Imperial Beach, is the author of Assembly Bill 1771. It was co-authored by Assemblymember Kevin Mullin of California’s 22nd District, which is South San Francisco and South San Francisco Bay. They state that the focus of the bill is on investors/flippers. The only problem is it targets the capital gains from the sale or exchange of any qualified asset.

Qualified assets in this case are single family homes. Multi-units are exempt and affordable housing inventory is exempt. There are three categories of taxpayers that are also exempt from this proposed tax. Any active-duty military, a decedent (an heir), or a first-time home buyer who uses the property as their primary residence. But all other buyers/owners of single- family homes are going to pay dearly if this bill passes.

Here's the nuts and bolts of this proposed tax. Beginning Jan. 1, 2023, an additional tax shall be imposed at the rate of 25% on the portion of a taxpayer’s net capital gain generated because of the sale or exchange of a qualified asset. This tax is on property sold within the first seven years of purchase.

If you purchase a single-family home and sell it within the first three years since the date of your purchase, you will be taxed 25% on your gain. If you sell your property within years 3 and 4, you will be taxed 20% on your gain. If you sell within years 4 and 5, you will be taxed 15% on your gain. If you sell your property within years 5 and 6, you will be taxed 10% on your gain. If you sell your property within years 6 to 7, you will be taxed 5% on your gain. Only, if you hold your property for at least seven years are you totally exempted from this additional tax.

A tax already exists when sellers make a profit above $250,000 for an individual owner, or $500,000 for joint owners. This new state tax would be in addition to the current taxes on the property. I understand, these numbers sound huge, and for people that are not homeowners, maybe ridiculous, but there is always a lot of risk when you purchase real estate, so an owner should be allowed to capitalize on their risk to the greatest extent possible.

Afterall, it was their money and credit that took the risk, they should be the recipient of the profit, not the state or federal government who had no stake in the initial investment.

Real estate is a cyclical business. Some people seem to have the Midas touch. They buy low and sell high. Other people don’t have the same timing. Think back to 2006. It was a frenzy in the marketplace. Then 2008, the “Big Short” happened. It didn’t happen because an individual decided to take a crazy risk. It happened because someone outside that individual's circle decided to mess with lending guidelines which caused a flood of bad loans being made.

Then “Kapow!” Real estate was in the tank! Innocent people had to sell their homes, many who had not owned them for seven years. Everyone of them would have been hit with this tax. They’re not investors. They’re not flippers. They were individuals trying to build their family’s wealth by investing in real estate.

Frankly, from my perspective, even investors/flippers shouldn’t be penalized for the profit they make. They took the initial risk, they invested additional funds into the property to bring it up to market standards, and then they sold it for fair market value. They should be able to continue to stimulate the economy with their investing and receive the profit for their risk and time.

We seem to live in a society that believes everyone should have the same amount of everything, especially opportunity. In a perfect world, where God was the preeminent head, is that even remotely possible? It’s like thinking that everyone on the team should get the same trophy. That’s what occurs today in our youth sports. Our children are taught very early on the concept of equal reward despite the talent or effort.

The problem is that philosophy isn’t incentivizing the over achiever, it’s the opposite. People need to understand and value the commitment it takes to become the best. There is only one MVP, at the professional sports level. There is only one valedictorian (possibly more if their grade point average is the same) There is only one CEO, CFO, one president, one leader.

This proposed tax seeks to make things fairer by, once again, applying a stick approach to buying and selling property. The authors purport that the reasoning behind the bill is opening the door to more consumers buying homes, because supposedly, if the investor understands they will have to pay exorbitant taxes on their investment, they will stay out of the market.

I don’t know about you, but I have realized over a lifetime of experience, that anyone who is at the top of their game, finds a way to get over any hurdles put in their way, and still reach their goal. This bill/tax is not going to fix what is broken. Not only because it doesn’t only target investors, but because that isn’t the solution to fixing housing prices. Supply is the only fix, and even if every investor got out of the real estate market over this proposed bill, it wouldn’t add enough supply to change things. But that’s another article.

I don’t want to lose sight of the biggest problem with this proposed bill. It will affect most everyone who purchases a primary residence and doesn’t keep it for at least seven years. Suppose you purchase a home to be closer to your children and grandchildren, and then your children get a job transfer to another location? If you sell your home, and you haven’t owned it for at least seven years, you will pay this tax.

Or how about this situation. You and your husband of 50 years decide to downsize so you purchase a smaller home. One of you becomes ill and passes. The remaining spouse decides they want to be closer to family. If you’ve owned this home for less than seven years, you will pay this tax. What about the person that gets a job transfer? Or loses their job? Or has a baby and needs a bigger home? Or gets married and finds themselves with a larger blended family that needs more bedrooms and baths? All of these are situations that would trigger the tax.

Enough is enough. If California legislators really want to make homeownership more affordable or more accessible to everyone, they need to do the hard work and come up with incentives for communities, individuals, and lenders to support home ownership for everyone. But this approach is hard. It requires buy-in from everyone in the state, residents up to all levels of government.

It’s easy to grandstand and take a position against the purported evil “flipper/investor.” This message sells to the masses. The real leader will bring people together to find a solution that solves the problem. It will be more than a “sound bite,” it will be a real solution that involves compromise from all the stakeholders, that truly can benefit everyone. I support that!

If you agree with me, please reach out to your Assemblymember, your State Senator, your local government leaders. Your voice represents a vote, and that matters to them. Speak up or watch as the state of California takes another bite out of your life’s investment.

Kim Murphy can be reached at [email protected] or 760-415-9292 or at 130 N Main Avenue, in Fallbrook. Her broker license is #01229921, and she is on the board of directors for the California Association of Realtors.