Extended Tax Credit for Homebuyers

Nearly 32,000 California homebuyers can claim state tax breaks of up to $10,000 starting May 1 under a bill signed Thursday by Gov. Arnold Schwarzenegger.
But the hopes of thousands of Californians for a shield against state taxes on forgiven mortgage debt will have to wait until at least April 5, when lawmakers return to Sacramento.
The same day Schwarzenegger approved the homebuyer tax credit bill, Assembly Bill 183, he vetoed a bill that would prevent the state from taxing mortgage debt forgiven last year for Californians who got loan modifications or sold their homes in distress sales.
Schwarzenegger vetoed the bill over an unrelated provision regarding tax refunds for the state’s largest businesses. It was a repeat of a veto last year over the same issue.
The bill vetoed Thursday would have aligned much of California’s tax code with that of the federal government. But even in vetoing it, Schwarzenegger expressed support for one of its most widely awaited provisions – the ban on taxing forgiven mortgage debt.
Highlights of New California First Time Homebuyer Tax Credit
• $10,000 tax credit or 5% of purchase price (whichever is lower)
• New and existing homes are eligible
• $200 million in funds available on a first come, first serve basis
o $100 million is allocated for qualified first-time home buyers and $100 million for purchasers of new, or previously unoccupied, homes
• Credit given in 3 equal payments to a taxpayer’s personal income tax returns over 3 year period (up to $3333.33 per year)
“I signed a law in 2008 that forgave this debt for two years and I am supportive of extending the law,” he said in his veto message. Schwarzenegger immediately called for the Legislature to send him a bill to provide the tax forgiveness before the April 15 tax-filing deadline.
“Everybody agrees we need to do something about that,” said Schwarzenegger spokesman Aaron McLear.
Schwarzenegger objected to a provision in the bill, SBX8 32 by Sen. Lois Wolk, D-Davis, that would have penalized businesses for seeking some state tax refunds. The federal government has penalties similar to those proposed in Wolk’s bill.
Two bills that also would provide tax relief on forgiven mortgage debt remain in the Legislature. Lawmakers are expected to pass one when they return.
“We will not hold people in desperate need hostage,” said Alicia Trost, spokeswoman for Senate President Pro Tem Darrell Steinberg, D-Sacramento. But she called the governor’s Thursday veto of a bill that promised relief “an unfortunate and ill-advised decision.”
Thursday’s tax credit launch got the most attention. The governor signed the bill in Fresno, a city hard hit by foreclosures.
The real estate industry immediately praised the governor’s action, saying it would move buyers off the fence.
Liz Snow, chief executive officer of the California Building Industry Association, said in a statement, the tax credit will “jump start the home building industry, which will help create jobs and reinvigorate the state’s economy.”
The legislation allocates $200 million to new buyer tax credits. Half will fund credits for buyers of new unoccupied homes. The other half funds credits for first-time buyers who buy resale homes.
California Association of Realtors President Steve Goddard said the tax credit “will incentivize first-time homebuyers to purchase homes that have been abandoned, foreclosed upon, and returned to the lender, or have been sitting on the market for extended periods of time.”
In both cases, buyers can waive whatever state taxes they owe – up to $3,333 – in each of the three years after buying. The program begins with escrows that close May 1 or after. Buyers who close escrow before then, and those who closed after a similar 2009 tax break ended last July, are ineligible.
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