In an effort to stimulate the economy, California is offering first-time homebuyers up to $10,000 in state tax credits. Two different types of homebuyer credit are available: credits for first-time homebuyers and credits for homebuyers opting for new homes. The credits are alternative credits, such that a homebuyer qualifying for both must choose one or the other.
Gov. Schwarzenegger hopes the program will “get people off the fence and into homes,” Mercury News reported.
With a 12.5-percent unemployment rate, the fifth highest in the nation, California plans to spend up to $100 million on the homebuyer tax credit programs. These programs operate on a first-come, first-serve basis, and give homebuyers 5 percent credit on the purchase price of a home, up to a $10,000 maximum. A similar program last year made homebuyer tax credits available to more than 10,000 Californians.
To be eligible for the new credit, applicants must close escrow on or after May 1, 2010. It may take up to six months to be notified by the California Franchise Tax Board whether a tax credit is available, and any credit must be applied in three equal annual installments.
California Tax Credit for New Home Buyers
The California tax credit for new home buyers is intended primarily to encourage jobs in the construction industry.
The new home tax credit applies only to purchased single-family homes that have not been occupied previously. The taxpayer receiving the credit must be eligible for the homeowner’s exemption and must live in the home for two years immediately after purchase.
For the new home tax credit, taxpayers may make reservations indicating their intention to apply for a credit upon entering into an enforceable contract after May 1. The reservation expires two weeks after closing.
California First-Time Home Buyer Tax Credit
The conditions underlying the first-time homebuyer credit are identical to the conditions for the new home buyer credit, but for the requirement that the home must never been occupied.
Taxpayers may not reserve tax credits under the first-time homebuyer program.
According to the California Franchise Tax Board, taxpayers had already applied for $2.3 million of the $100 million allocated to the homebuyer tax credits by May 4. Those interested in the program would be wise to act quickly, to avoid missing out on the tax incentives.
New Tax Law Assists Californians With Cancelled Debts
The relief a debtor feels upon a creditor forgiving or canceling a portion of a debt often gives way to frustration when the tax man comes knocking. For taxation purposes, forgiven debt constitutes income subject to taxation unless there is a statutory directive to the contrary.
Three years ago, Congress opted to give homeowners who have become unable to pay their mortgages a break. Under the Mortgage Debt Relief Act of 2007, taxpayers who had their debt reduced through mortgage restructuring or debt forgiven in connection with foreclosure do not have to include the forgiven debt as income for federal tax purposes.
However, federal taxes are only one component of the overall tax burden; homeowners must also pay state taxes, which are governed by state laws. Recently homeowners in California have not been granted similar relief under state tax laws.
California law aligned with federal law on this matter in 2007 and 2008, but the protections had lapsed. Accordingly, since 2009, California homeowners have been required to treat any forgiven debts as income when calculating state taxes.
Fortunately, California lawmakers have now addressed this burden, once again. Under SB 401, signed into law in April, California law aligns with the federal Mortgage Forgiveness Debt Relief Act of 2007. The new law is effective for tax years 2009 to 2012, retroactively providing relief for those who become unable to pay their mortgages in 2009 and early 2010.
Under the new law, Californians with qualifying short sales of their homes will not be required to pay state income tax on the forgiven debt. The legislation also excludes from state taxation any loan forgiveness associated with home loan modifications or foreclosure.
Many of the homeowners affected by the new law have already lost their homes due to the floundering economy. Requiring homeowners to pay tax on a debt forgiven because they were without means to pay the original debt seems unnecessarily harsh.
Although a tax break is unlikely to compensate for the loss of a home, it does help to ensure that those facing financial difficulties will be able to return to solid financial ground more quickly.
For more information on real estate law in california, please click california real estate law.