Date of Hearing: March 4, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 155 (

Author:Voepel) – As Introduced Ver:January 7, 2019

FOR TESTIMONY ONLY

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: credit: qualified principal residence

SUMMARY: Allows a $5,000 tax credit to a taxpayer who builds "a qualified principal residence" if building costs are $350,000 or less. Specifically, this bill:

1. Allows a taxpayer to claim a tax credit of $5,000 for costs paid or incurred during the taxable year for building a "qualified principal residence".
2. Applies to taxable years beginning on or after January 1, 2020, and before January 1, 2025.
3. Defines "qualified principal residence" as a single-family residence that meets both of the following conditions:
   1. The residence building costs were $350,000 or less; and,
   2. The residence will be used exclusively as the taxpayer's principal residence for at least the first five taxable years after the taxable year for which the taxpayer is allowed the credit.
4. Allows carryover of the tax credit for up to five taxable years if necessary, until the credit is exhausted.
5. Requires the Franchise Tax Board (FTB) to recapture the tax credit if the taxpayer uses the residence for any purposes other than as the taxpayer's principal residence in the first five taxable years.
6. Limits a taxpayer to one $5,000 credit.
7. States legislative intent to comply with Revenue and Taxation Code (R&TC) Section 41.
8. Repeals these provisions on December 1, 2025.
9. Takes effect immediately as a tax levy.

EXISTING LAW:

1. Provides various tax credits designed to provide tax relief for taxpayers who incur certain expenses or to influence taxpayers' behavior.
2. Lacks any tax credit for building a principal place of residence.

FISCAL EFFECT: Pending

COMMENTS:

1. The author has provided the following statement in support of this bill:

AB 155 helps Californians realize the American Dream by getting one step closer to homeownership. This measure provides a tax credit for individuals who will be building a home as their principal residence. The goal is to help as many Californians achieve their dream to homeownership.

1. Committee Staff Comments:
   1. What does this bill do? This bill allows, under the Personal Income Tax Law, a one-time $5,000 income tax credit to a taxpayer who builds and occupies a principal residence, but only if building costs are $350,000 or less.
   2. What constitutes "building" a residence? This bill extends the tax credit to "a taxpayer for building a qualified residence."  This could be narrowly interpreted to mean it applies only if the taxpayer physically constructs the home themselves. A taxpayer might own a parcel of land and physically provide the labor, act in a general contractor capacity themselves, or hire a general contractor to build the home. If a person purchases a newly constructed home from a home developer or contractor that allows significant customization of the residence, would the tax credit apply? Since the tax credit is predicated on the condition that the taxpayer is "building" a residence, implementation uncertainties may occur.
   3. What costs? This bill does not define "building costs." Given the $350,000 building cost bright-line, disputes could arise as to the "costs" to count to qualify for the credit. For instance, a taxpayer might argue that certain soft costs like architectural fees should be subtracted to fall below the $350,000 threshold. Generally, soft costs are thought of as those expenditures for items other than labor and materials typically incurred in bringing the property to a finished state.
   4. Wildfire victims rebuilding: In recent years, California wildfires have destroyed thousands of homes. This bill could offer an income tax benefit to those homeowners re-building on their land. That said, given the unprecedented number of homes to be constructed, this bill does not cap the total amount of tax credits available on a statewide basis. During the real estate downturn, state tax credits were made available for the purchase of certain principal residences. These credits were fully allocated in a short period of time.^[1]
   5. Prior tax credits for new homes: The Legislature authorized tax credits for taxpayers purchasing a home between March 1, 2009, and March 1, 2010 that had never been previously occupied. Qualifying taxpayers could claim a tax credit equal to the lesser of 5% of the purchase price or $10,000 [SBx2 15 (Ashburn), Chapter 11, Statutes of 2009-10 Second Extraordinary Session). SBx2 15 authorized $100 million in tax credits, which the FTB allocated on a first-come, first-served basis. The following year, the Legislature extended the SBx2 15 credit with some modifications, and also allowed a credit for first-time homebuyers [AB 183 (Caballero), Chapter 12, Statutes of 2009-10]. AB 183 authorized $100 million each for new homes and first-time homebuyers, as defined, which FTB again allocated on a first-come, first-served basis. FTB fully allocated both credits by August 2011; both expired on December 1, 2014.
   6. Auxiliary Dwelling Units: To address the need for new housing given the housing crisis, Accessory Dwelling Units (ADUs) are a growing option. ADUs are known by various names: granny flats, in-law units, backyard cottages, or secondary units. Various laws have been enacted to promote the development of ADUs. ADUs can work well in extended family situations. Thus, a taxpayer could pay to construct a "single-family residence" as their principal residence on another family member's land. For example, a parent might fund the construction of an ADU to be the parent's principal residence on the same land as their child's principal residence (or vice versa). The author may wish to explicitly address this scenario to provide clarity to both taxpayers and tax practitioners.
   7. Modular homes and Manufactured homes? It may be helpful to clarify whether the tax credit applies to modular or manufactured homes. There are site preparation costs or auxiliary buildings associated with this type of principal residence that might benefit from the tax credit.
   8. Five-year sunset: This bill's proposed tax credit includes an automatic sunset after five years to repeal its provisions, consistent with this Committee's longstanding sunset-date-inclusion policy. Tax credits result in foregone revenue losses. As such, they are characterized as "tax expenditures". Without sunsets, once enacted tax expenditures may be reviewed infrequently and may result in uncontrolled revenue losses. The Department of Finance's 2017-18 Tax Expenditure Report identifies $61.3 billion in such tax expenditures. Moreover, absent a sunset provision, tax expenditures can be conferred by a majority vote but can only be rescinded with a supermajority vote. For these reasons, this Committee's policy is to include a sunset date to allow the Legislature to periodically reevaluate tax expenditure programs.
   9. Committee's Tax Expenditure Policy: This bill includes intent language to comply with R&TC Section 41. SB 1335 (Leno), Chapter 845, Statutes of 2014, added R&TC Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015. This Committee has recently implemented a new policy, requiring that all new tax expenditures, including tax credits, comply with the requirements of R&TC Section 41. Tax expenditure proposals must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets the goals, purposes, and objectives so-identified. According to this Committee's tax expenditure policy, a tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements. This bill, in its current form, does not comply with the Committee's policy.
   10. Related Legislation: AB 282 (Voepel) proposes a $1,000 tax credit for a single-family residence, whether detached or attached, that is completed as new construction on or after January 1, 2021, and before January 1, 2025, that is purchased to be the principal residence of the taxpayer and has never been occupied. AB 282 is set for hearing by this Committee on March 11, 2019.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

Analysis Prepared by: Rose Marie Kinnee / REV. & TAX. / (916) 319-2098

1. Former R&TC Section 17059.1. ↑