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Flippers might get taxed up to 25% in California

Updated: Jun 27

By: Marie Fleming

CEO Gold Bridge Capital Solutions


A bill that would massively tax house flippers and speculators who buy and sell a house within three years was moved to the Assembly Committee on Revenue and Taxation. Assembly Bill 1771, authored by Assemblyman Chris Ward (D-San Diego), would impose a 25% tax on all net capital gain from the sale or exchange of homes or properties. While the tax may be reduced if significant time has passed, those qualified taxpayers who buy and sell a house within 3 years would need to pay the tax. All revenue from the tax would go to the Speculation Recapture Community Reinvestment Fund.


The bill, also known as the California Housing Speculation Act, would also take effect immediately as a tax levy for all taxable years beginning in 2023 (if passed). As AB 1771 would result in a tax change, 2/3rds of each house would need to approve for passage.

Assemblyman Ward wrote the bill to specifically target short-term investors who buy homes and other properties, keep them for some time, then sell them at a profit a short time later. This includes house flippers, who renovate properties to sell back, speculators, who often outbid other buyers in the hopes that home prices rise significantly, and cash-only buyers.


Why though?


“Speculators are taking gobs of tens of millions of dollars out of our community through the cumulative effect of all these transactions. That’s not fair either because the people that are left struggling are people who get outbid 30 times trying to get into their home,” said Assemblyman Ward this week. “It would be an additional income tax on the profit gain from a sale that occurred within three years of the previous sale. But we’ve also seen this influx of short-term investors trying to get into the market, outbid San Diegans and Californians with all-cash offers, and drive the prices up for everyone. So, if somebody’s trying to go in there, fix up a fixer-upper and then sell it for record profits, that is distorting the market because somebody else could have gone in there, done the same and kept the home.”


Ward also cites the California Association of Realtors’ quarterly index, who found that California’s median price for a single-family home increased 17 percent to $814,580 in the third quarter of 2021, while near-record lows of 42 percent of Californians could meet home-buying qualification standards. At the same time, investor-buyers accounted for 51% of all sales in Southern California.

Ward also charges that investor-buyers have depleted the market and increased demand for housing, have caused home prices to go up, and have pushed out many middle-income buyers.


Are Flippers the Problem?


The real estate market has seen dramatic increases in value – especially during the pandemic. This is extremely frustrating to many consumers, but at the same time, flippers aren’t the big driver of price gains. Crazy low mortgage rates and incredibly anemic housing supply are the big culprit.


This bill targets home flippers, who are actually creating inventory for buyers. It’s true that these homes are going to be more expensive after being remodeled, but keep in mind some of these homes would not have been able to obtain traditional financing due to condition. And most of all, buyers are purchasing these homes, which shows the public wants them (huge point). Flipped units come in all sorts of price ranges, and there are many first-time buyers also buying flips.


What about investors?


In the background, Wall Street investment funds are salivating over residential real estate, and the irony is AB 1771 doesn’t target them at all because they’re buying and holding instead of flipping. We’ve seen lots of articles about corporations like Invitation Homes or BlackRock. Sometimes these stories are blown out of proportion, but there’s no mistaking we’re seeing big entities trying to play Monopoly in real life.


Ward also charges that investor-buyers have depleted the market and increased demand for housing, have caused home prices to go up, and have pushed out many middle-income buyers.


"But it’s not only the number of houses either. Investors get tax write offs from mortgage interest and property taxes. That’s where you can really get investors. Or from depreciation. An added tax is the simple knee-jerk solution. There’s a lot more to go after if you really want to reduce investors from buying properties if you know where to look.” - Ward


Outcome:


While the bill has yet to receive significant support in the Assembly yet, many investors and those in real estate have come out in opposition to the bill, arguing that many cash buyers are not investors, that many house flippers renovate properties that would have otherwise made them unmarketable, and that local investors would be pushed out for larger investing firms who could easily take the 25% tax if passed, decreasing the housing supply even further.


The real problem is we need more supply and more affordable housing. This bill will create a fund with tax revenue to benefit some, but it doesn’t help homes become more affordable, and it doesn’t lead to producing more inventory for consumers.


Questions for thought:


Would we want this if prices weren’t rising any longer?


Lastly, if you penalize home flippers, will this pave the way for more buying and holding, Airbnb rentals, and institutional investor activity?



Resources:

- Sacramento Appraisal Blog

- California Globe


 

Gold Bridge Capital Solutions

Phone: 916-236-5075

Email: info@goldbridgecs.com

Address: 4142 E. Commerce Way Suites #102, #113

Sacramento, CA 95834

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Website: www.goldbridgecs.com


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