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A New Assembly Bill Might Impose Additional Taxes on Properties Sold Within 3 Years of Purchase!

Here's something to keep an eye on......Assembly bill 1771 (The California Speculation Act) introduced in 2022 would impose a 25% 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%, and it would decline by 5% each year thereafter until it is eliminated after seven years.

The author of the bill and advocates say that investors typically resell these properties with inflated prices which in turn, increase competition and drive up market prices for comparable homes.

To some extent this is true but there are other perspectives:

  • Flippers help improve neighborhoods with exterior paint, clean up and landscaping and in order to maximize their investment, they repair, remodel and improve the subject property. In my opinion, that's a good thing!

  • Flips are generally sold to individual buyers who are looking for a "move in" ready home. Most are nervous about tackling "fixers" and also don't want to spend the time and money to complete a remodel project.

  • Building costs have gone up substantially over the past year, contractors and vendors are hard to find and many people don't have the confidence or skill set to handle repairs and remodels. The investor takes care of the design, construction and permits (always make sure they were done correctly) so it's a tradeoff for the buyers.

  • Most professional flippers do this for a living and know who to call, what materials to use and how to find solutions to difficult construction challenges. Granted, not every flip is done well and sometimes sales prices are high but investors take risks and gamble on the market every time they buy a property. It's their business.

  • If home owners have to hold on to their property for 7 years, we are going to have an even greater inventory shortage which will in turn cause greater competition and higher prices across California. It will perpetuate the Seller's Market!

  • People in the military and those who have to change jobs or move to different locations will be less likely to purchase a home if they know they may have to sell in a couple of years.

The proposed tax would allow exemptions for first-time homeowners but it would still apply to homeowners on their second or third purchase looking to upgrade. This means that if this was the 3rd home you have owned and you had a life changing event that required you to sell, you would be taxed for up to 7 years on the profits of that sale. I don't know about you but that doesn't sound fair!

We'll see what happens but the California Association of Realtors does not support these efforts.

Source: OpenStates - AB 1771


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