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Flipper Tax Proposed

The owner-occupiers are the crazy bidders, not the investors, so this will have no impact on the current frenzy:

House flippers could be taxed 25 percent of their profit under the California Speculation Act, a bill introduced by Assemblymember Chris Ward, D-San Diego. Assembly Bill 1771 aims to discourage real estate speculation that Ward said drives up home prices as equity investors outbid individual home buyers.

“We’ve heard of people getting into their first home getting beat by cash offers” from investors, Ward said at a news conference Wednesday at the San Diego County Administration Center.

Those investors typically resell the properties soon afterward at inflated prices, stoking competition for limited housing and driving up market prices for comparable homes, he said.

The bill, introduced last week, would impose a 25 percent tax on the profits from a home resold within three years after it’s bought. After the third year, that rate would drop to 20 percent, and decline each year afterward until it is eliminated after seven years.

Most California homeowners keep their property for 10 to 16 years, Ward stated, so it would not affect most people buying a home for personal use.

Certain categories of buyers, such as first-time and military homeowners, would be exempt from the taxes.

Taxes collected from short-term sales would be distributed to cities, schools and affordable housing funds, Ward said.

The goal is to create a disincentive for equity investors, freeing up homes to people buying for personal use. “When investors fall out of the buying pool, that will give regular home buyers a chance to buy a home,” Ward said.

Housing prices rose about 20 percent statewide in 2021, Ward said.

In San Diego, they jumped 26 percent last year, earning the region the distinction as the nation’s least affordable metro area , with housing prices outpacing income.

Meanwhile, the share of homes purchased by investors instead of families has increased in recent years, the bill stated.

First-time homeowner Trisha Cortez spoke during the news conference, describing her recent experience house-hunting in the San Diego area. A health care worker with good credit, she said she was easily able to secure a loan but the home search was a grueling process until she bought a condo in Talmadge.

“I regularly offered above asking prices, but cash buyers would swoop in and take the property,” she said. “I’ve been denied 33 times before getting a home.”

Housing production is falling far behind demand, said University of San Diego economics professor Alan Gin. The region needs about 17,000 new homes per year, but over the past three years it has produced just about half that — 8,216 homes constructed in 2019; 9,472 built in 2020 and 9,358 in 2021, he said.

Other real estate experts said that’s the real issue. Despite efforts to curb real estate speculation, there will be no relief for home buyers until more housing is built, said Lori Pfeiler, CEO of the Building Industry Association of San Diego County.

“While we appreciate Chris’ objective, ultimately this is a supply issue,” Pfeiler said. “We don’t have enough homes for sale, inventory is low and anyone thinking of selling their home just won’t sell their home; they’ll figure out how to hold onto it.”

Pfeiler said lowering fees and reducing regulatory barriers to housing construction would be more effective at curbing prices.

Gin said that San Diego is such a desirable location that housing speculation would likely continue even with greater home production.

Gary London, a real estate economist and senior principal with London Moeder Advisors, warned that while the bill may ease pressure on buyers, it would limit options for sellers. He said most institutional investors target mid-price housing rather than luxury homes, so the sellers most impacted would be middle-income homeowners rather than the wealthy.

“I don’t like it, because it’s effectively an attack on the property rights of sellers,” he said.

Pfeiler also said the bill could inadvertently reduce geographic and economic mobility by restricting people from selling a home because of a job change or other economic necessity, she said.

“Chris is looking for bold ways to help us with the housing crisis, but on many, many fronts this will constrain supply and constrain people’s choices about what job they take and where they locate,” she said.

Ward said that the bill may be amended to exclude primary residences, so people buying homes for their own full-time use would not be taxed.

“We will continue to look for those buckets of people who should be exempted,” he said. “The intent of this bill is not to penalize everybody but to dissuade activity that is driving up prices for everybody.”

Link to Article

Carlsbad Condo Debate

The UT has published two articles about the these goofy-looking condos in North Carlsbad that supporters are saying that they need to be saved, in spite of the new owners purchasing each individual condo separately and abiding by city zoning and planning:

Excerpt from the first UT article:

Modern architecture fans hope to save a small, but distinctive condominium building known for its whimsical appearance near Carlsbad’s Magee Park.

The 40-year-old building, sometimes called the Victor Condo, on Garfield Street is one of the first examples of a postmodern style often called “Blendo” created by San Diego architects Ted Smith and Kathleen McCormick.

“Victor Condo is clearly of cultural significance and a fine example of a pivotal historic time in Carlsbad’s build-environment growth from a small coastal community to a vibrant city worthy of vibrant architecture,” said Peter Jensen, a writer and editor at Sunset Magazine and San Diego Home/Garden magazine for 40 years.

As “affordable yet stylishly significant (not to mention excitingly livable) dwellings” the buildings are an example of late 20th century innovation in an area that too often relies on cookie-cutter architecture,” Jensen said in comments on a petition to save the structure.

“We believe the building qualifies as a design on the vanguard of an important architectural movement,” states the petition posted by San Diego architect Patrick Cordelle, who works with Smith and McCormick.

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Second Homes – Tax Benefits

A primer on second homes vs rentals:

Before buying a second home, it’s smart to know how owning a second property could impact your taxes. There are many second home tax benefits to consider, but they’ll vary based on how the IRS classifies the property — as a second home, an investment property, or a little of both. Here are the main differences:

A second home:

  • Is occupied by the owner at least 14 days out of the year
  • Is rented to others 14 days or fewer out of the year

An investment property:

  • Is occupied by the owner fewer than 14 days out of the year
  • Is rented to others more than 14 days out of the year

A mixed-use property:

  • Is occupied by the owner more than 14 days out of the year
  • Is rented to others more than 14 days out of the year

Second home tax benefits

As long as you occupy your second home for more than 14 days a year, you may qualify for these second home tax breaks: 

Mortgage interest deduction

Single filers and married couples filing jointly can deduct mortgage interest up to a total of $750,000 from all properties they own, including a principal residence and their second homes. This is subject to change in 2025, when the Tax Cuts and Jobs Act is scheduled to expire. At that time it is expected that the $1 million limit will return.

Property tax deduction

You can deduct property taxes on all the properties you own, with a maximum deduction of up to $10,000 per tax return, or $5,000 if married filing separately. Keep in mind that this is included in the deduction for state and local income taxes (SALT), so you might reach that $10,000 quickly with your principal residence and be unable to deduct property taxes from a second home.

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No Changes to 1031 (Yet)

There may be changes some day, but not now – and probably not any in the near future.

Important news from Washington, DC this week indicates a positive outlook for 1031 exchanges to survive in their current form.

The House of Representatives Ways and Means Committee advanced a reconciliation bill that did not include any changes to 1031, or several of the other tax reform proposals that had been floated earlier in the year which would have affected real estate investors.

Eviction Moratoriums

Will this cause people to sell their rentals just because the rules are complicated? Probably not, but they won’t have much patience for tenants who have been taking advantage of the system. From CAR:

The statewide eviction moratorium under the COVID-19 Tenant Relief Act (CTRA) is due to end today. However, the law will not simply return to its pre-pandemic form. Instead, a new law, the COVID-19 Rental Housing Recovery Act, will take its place. Here are the key differences in practices and procedures.

  • Exemptions for SFP and new construction to the just cause eviction rules return. Beginning October 1, the standard exemptions to the just cause eviction rules return, the most significant ones being for single family properties and new construction properties built within the last 15 years.
  • For rent due prior to October 1, 2021, the 15-day notice is still required (but not for rent due prior to March of 2020). To avoid confusion after October 1, if a tenant owed COVID rent from before October 1, 2021, it is highly recommended to use the appropriate forms to demand the rent now.
  • Special 3-day notice beginning October 1, 2021, through March 31, 2022, and the requirement of applying for Emergency Rental Assistance. Beginning October 1, a landlord may demand the full amount of rent using a special 3-day notice to pay rent or quit for rent that became due on or after October 1. However, the new notice requires the landlord to apply for emergency rental assistance. This special 3-day notice will be required for all rent due until March 31, 2022.
  • Tenancies commencing October 1, 2021, are not subject to the special 3-day notice. If the tenancy has commenced on or after October 1, 2021, then neither the special 3-day notice nor the requirement to apply for emergency rental assistance is required. Instead, on that date landlords can return to using the traditional 3-day notice to pay rent or quit.
  • On November 1, 2021, the landlord may collect unpaid COVID rent due from March 2020 through September 2021. Beginning November 1, 2021, the landlord may initiate a legal action to recover the unpaid COVID rent. This includes going to small claims court to recover any amount of COVID rental debt even if it is otherwise over the small claims court limits.

The above explanation is a simplified version of a surprisingly complicated procedure. C.A.R. intends to update its landlord/tenant forms where necessary. This will include:

  • The introduction of the special 3-day notice to pay rent or quit for rent demanded from October 1, 2021, through March 31, 2022
  • The reintroduction of the standard 3-day notice to pay rent or quit (for tenancies commencing after October 1, 2021)
  • The removal of the “Notice of Termination of Tenancy COVID Tenant Relief Act” (form NTT-CTRA)
  • The return, in its pre-pandemic form, of the “Notice to Terminate Tenancy” (form NTT)

Even though C.A.R. may make forms available for landlords to use, all persons are strongly urged to work with their own landlord/tenant attorney specialist before providing these notices, especially if their ultimate aim is to evict through a court procedure.

Tenant Screening

For those who might be thinking about my idea of renting your home for a year so you can defer the capital-gains tax when you exchange it for other(s), know that California is a tenant-friendly state.  Just the denying of a tenant has potential consequences!  We can refer you to a local property manager to assist you.

1031 – Identifying Replacement Properties

We’ve completed many regular and reverse 1031 exchanges, and it is critical to follow the IRS rules when identifying the replacement properties.

For a successful 1031 exchange, it is important to understand and comply with the 1031 exchange identification rules.  These rules are not that complicated, but a failure to follow the rules may ruin your exchange.

Here are the top ten things to remember when identifying replacement property in an exchange:

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Rental Property & Returning the Deposit

Speaking of the joys of being a landlord, here is the C.A.R. summary of how to handle the security deposit:

California law allows a property owner/landlord/property manager (housing provider) to collect from a residential tenant a security deposit before the tenant takes possession. The amount of the security can be equal to two-months’ rent for an unfurnished dwelling, and three-months’ rent for a furnished unit.

At the end of the tenancy, the housing provider can use the security deposit (i) to recover the cost of repairing damage to the premises, exclusive or ordinary wear and tear, and (ii) for cleaning necessary to return the premises to the same level of cleanliness it was in at the beginning of the tenancy. The tenant is entitled to an itemized statement of the use of the security deposit within 21 days of vacating the premises. The best way to determine if the security deposit is being used for a proper purpose is to document the condition of the property at both the beginning and end of the tenancy.

Many standard form leases contain a provision similar to paragraph 10 in the C.A.R. Residential Lease or Month-to-Month Rental Agreement (C.A.R. Form LR) to address the condition of the premises.

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Big Money Moving In

NEW YORK, July 29 (Reuters) – Beset by COVID-19 and its fallout, local landlords are offloading their properties to cash-rich institutional investors, and America’s real-estate market may never be the same.

Before the pandemic, boyhood friends Michael Murano and Richard Tyson owned 96 rental units in their hometown of Rochester, New York. They offered accommodation to low-income tenants, many in the service industry, from rooming houses to single-family starter homes.

Today, they’re well on their way to liquidating the entire portfolio. Two-thirds of the units are already gone. The buyers? Large investors with all-cash offers.

“It broke my heart to sell 15 single-family homes to just one, out-of-state big corporate investor,” said Tyson, a 38-year-old U.S. Navy veteran.

“The last thing we need is to be exporting wealth out of this community, and limiting wealth creation here. But I knew we had to get the hell out of affordable housing – fast – because this was going to be a tidal wave coming at us.”

Many of America’s landlords have gone a year and a half without being paid by tenants, who’ve been protected by several state and local eviction moratoria as well as an umbrella federal ban enacted 11 months ago.

The owners have been waiting for $46 billion to help them survive without that income. The funds were approved by Congress months ago, but bureaucracy creaks; only $3 billion has reached them so far, according to U.S. Treasury Department data.

Now the eviction ban is about to end – on Saturday. Yet thousands of local landlords have already quit the business. And a growing number, like Tyson and Murano, are on their way out.

Taking their place: institutional investors, broadly defined in the industry as firms owning more than 1,000 units.

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Renting Out Your Home

A few ways to generate some extra dough with your home. Seen in the lat:

You can earn semi-passive income by renting out all or part of your personal residence.

Let’s say you list your house to rent while you take a two-week vacation. If you list on Airbnb or VRBO, you can charge a nightly rate plus a cleaning fee. Airbnb will deduct a commission to compensate itself for advertising your rental and collecting payment. If you rent out your house for $250 a night after Airbnb costs, that’s $3,500.  This is semi-passive income since there is a bit of work involved. You need to take photos of your home, list it on a website, respond to potential renters and arrange to have housekeepers do the cleaning. All told, that’s likely to take an hour or two per rental.

And you can rent to movie producers and event planners through Giggster, Peerspace and Splacer, among others. These sites encourage you to charge by the hour, which can enable you to earn four to five times what you’d get with Airbnb or VRBO. But there are unique risks with having movie productions and events at your home. Be sure to collect a deposit for potential damage and consult your insurance agent.

If you don’t want to rent out your house but are OK with letting people use your swimming pool, you can sign up with Swimply. The same cautions apply.

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