SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 252 (Leyva) - Income taxation: exclusion: mobilehome park sales

Bill Summary:

SB 252 would exclude the gain from the sale of a qualified mobilehome park to a qualified purchaser that agrees to maintain affordable rents for 30 years.

Fiscal Impact:

• The Department of Housing and Community Development (HCD) indicates that it would incur first year costs of $1.7 million, and about $1.2 million annually thereafter, to implement its provisions in the bill (General Fund).

• Additionally, for the prior version of the bill, the Franchise Tax Board (FTB) estimated that that for every $1 million in gain excluded, the revenue loss would be $80,000 (General Fund). FTB is still developing (1) its revenue estimate for the current version of the bill, and (2) its administrative costs.

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Background:

Tax expenditure programs (TEPs) are special tax provisions that reduce the amount of revenues the “basic” tax system would otherwise generate in order to provide (1) benefits to certain groups of taxpayers, and/or (2) incentives to encourage certain types of behavior and activities, such as charitable giving. Specifically, current law provides for, among other things, various income and corporation tax credits and deductions, as well as exemptions from the sales and use tax. The Department of Finance is required to publish a list of TEPs (currently totaling several hundred), which currently total $65 billion annually.

For individuals, capital assets are generally anything a taxpayer owns for personal or investment purposes such as a home, stocks, even collectibles or art. For businesses, a capital asset is generally any item of value a business owns that is not resold in the ordinary course of business, including land and buildings. Capital assets are defined differently when viewed from a tax perspective. For example, if one company buys a computer to use in its office, the computer is a capital asset, but if another company buys the same computer to sell in its ordinary course of business, the computer is inventory.

Capital gains are the gains that a company or an individual experiences on the sale of a capital asset. If the selling price of the asset is higher than the owner's basis in that asset, the result is a capital gain. The basis is generally the original purchase price of the asset plus any capital improvements less depreciation. Capital gains come in two forms: long-term and short-term. Short-term gains are gains on capital assets that the taxpayer held for a year or less before selling. Long-term capital gains result from the sale of assets that a taxpayer held or owned for more than a year before selling.

Under federal law, long-term capital gains for individuals are taxed at either 15 or 20 percent, depending on the taxpayer’s income. An additional Net Investment Income Tax of 3.8 percent may apply as well depending on the taxpayer’s specific circumstances. Corporations pay the regular corporation tax rates on the full amount of their capital gains.

Under federal law, there are circumstances when a taxpayer may exclude a portion of a capital gain from gross income. For example, federal law allows a capital gain exclusion from the sale (or exchange) of property owned and used as a principal residence for at least two of the five years before the sale—known as the Home Sale Gain Exclusion. An individual may exclude up to $250,000 of gain, while a married couple filing a joint return may exclude up to $500,000. Other federal law provisions permit some or all of any realized capital gains to be deferred and recognized at a future date, such as like-kind exchanges.

Under state law, capital gains are taxed at the same rate as ordinary income for both individuals and businesses. State law generally conforms to the federal Home Sale Gain Exclusion, as well as like-kind exchanges. State law also allows a capital gain exclusion for the sale of property by a taxpayer to a majority or more of the lower-income or very low-income tenants currently residing at the property.

The State’s housing shortage is well-documented. In its most recent statewide housing assessment, the Department of Housing and Community Development (HCD) estimates that California needs to build an additional 100,000 units per year over recent averages of 80,000 units per year to meet the projected need for housing in the state. While the state has recently enacted numerous measures to address the housing crisis, including SB 2 (Atkins, 2017), SB 3 (Beall, 2017), and SB 35 (2017, Weiner), it will take time for the effects to be felt by taxpayers in the form of lower housing costs.

Mobilehomes are considered the largest sector of non-subsidized affordable housing in the United States, home to 22 million Americans with a median annual income of less than $30,000. However, since the 2008 financial crisis, and as an aging generation of mom-and-pop park owners cashes out, a new group of investors has bought up a growing share of the market, set on raising rents to increase returns. In July 2018, Blackstone Group, the world’s largest private equity firm, bought a portfolio of 14 mobile home parks in California and Arizona for $172 million. Combined with restrictive zoning nationally which has slowed the creation of new parks, both mobile and manufactured home parks as a source of affordable housing is in decline.

Proposed Law:

This bill, for taxable years 2020 through 2024, would exclude from gross income the gain from the sale of a qualified mobilehome park to a qualified purchaser, as those terms are defined. The bill would limit this exclusion to the sale of a qualified mobilehome park during the taxable year for which the taxpayer seeks the exclusion.

The bill would require HCD to do the following: (1) develop and administer a process pursuant to which an organization seeking to become a qualified purchaser may submit an application to the department for approval, (2) certify as a qualified purchaser any applicant that the department determines meets specified criteria, (3) certify the sale of a qualified mobilehome park by a taxpayer to a qualified purchaser, (4) certify the qualified purchaser has recorded a deed restriction, as specified, (5) provide the taxpayer with a copy of the certifications, as specified, and (6) provide FTB, upon request, with a copy of the certifications and all of the following information:

• The taxpayer’s name and social security number or taxpayer identification number.
• The address of the qualified mobilehome park.
• The qualified purchaser’s name and social security number or taxpayer identification number.

HCD may issue regulations to implement the bill. Finally, the bill would require the Legislative Analyst’s Office to submit a report on the effects of the exclusion to the Legislature no later than January 1, 2025.

Staff Comments:

This bill would provide a tax incentive to mobilehome park owners to sell their parks to an organization who will maintain the park as affordable housing. HCD indicates the bill would result in first year costs of $1.7 million, and $1.2 million ongoing, to develop an application and submittal process, create guidelines for certification of sales, monitor compliance, record deed restrictions, deliver certifications and perform IT system changes to upgrade the existing program database. To the extent that HCD already has personnel and infrastructure in place performing similar tasks, costs to the implement the bill could be lower.

The bill also would result in unknown state revenue losses as a result of excluding capital gains from gross income for the sale of a qualified mobile home park. FTB notes that sales of mobilehome parks sold to entities willing to hold the park for another 30 years cannot be predicted. To determine the magnitude of the potential impact to the General Fund, both the frequency of sales and the capital gains associated with those sales must be known. Since it is difficult to predict the frequency and the value of future mobile home parks sales, FTB cannot assign a revenue loss to the bill. However, it is estimated that for every $1 million in gain excluded the revenue loss would be $80,000.

By expanding the scope of the crime of perjury, this bill would impose a state-mandated local program. However, any local government costs resulting from the mandate in this measure are not state-reimbursable because the mandate only involves the definition of a crime or the penalty for conviction of a crime.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2019 - 2020 Regular

Income taxation: exclusion: mobilehome park sales

Excludes the gain from the sale of a qualified mobilehome park to a qualified purchaser that agrees to maintain affordable rents for 30 years.

Background

Tax expenditures. California law allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives either to compensate taxpayers for incurring certain expenses, such as child adoption, or to influence certain behavior, such as charitable giving. The Legislature uses tax incentives to encourage taxpayers to do something that but for the tax credit, they would otherwise not do. The Department of Finance is required annually to publish a list of state tax expenditures, currently totaling around $65.2 billion per year.

Capital gains. For individuals capital assets are generally anything a taxpayer owns for personal or investment purposes such as a home, stocks, even collectibles or art. For businesses, a capital asset is generally any item of value a business owns that is not resold in the ordinary course of business such as land, and buildings, among other things. Capital assets are defined differently when viewed from a tax perspective. For example, if one company buys a computer to use in its office, the computer is a capital asset, but if another company buys the same computer to sell in its ordinary course of business, the computer is inventory.

Capital gains are the gains that a company or an individual experiences on the sale of a capital asset. If the selling price of the asset is higher than the owner's basis in that asset, the result is a capital gain. The basis is generally the original purchase price of the asset plus any capital improvements less depreciation. Capital gains come in two forms: long-term and short-term. Short-term gains are gains on capital assets that the taxpayer held for a year or less before selling. Long-term capital gains result from the sale of assets that a taxpayer held or owned for more than a year before selling.

Under federal law, long-term capital gains for individuals are taxed at either 15 or 20 percent, depending on the taxpayer’s income. An additional Net Investment Income Tax of 3.8 percent may apply as well depending on the taxpayer’s specific circumstances. Corporations pay the regular corporation tax rates on the full amount of their capital gains.

Under federal law, there are circumstances when a taxpayer may exclude a portion of a capital gain from gross income. For example, federal law allows a capital gain exclusion from the sale (or exchange) of property owned and used as a principal residence for at least two of the five years before the sale—known as the Home Sale Gain Exclusion. An individual may exclude up to $250,000 of gain, while a married couple filing a joint return may exclude up to $500,000. Other federal law provisions permit some or all of any realized capital gains to be deferred and recognized at a future date, such as like-kind exchanges.

Under state law, capital gains are taxed at the same rate as ordinary income for both individuals and businesses. State law generally conforms to the federal Home Sale Gain Exclusion as well as like-kind exchanges. State law also allows a capital gain exclusion for the sale of property by a taxpayer to a majority or more of the lower-income or very low-income tenants currently residing at the property (SB 1286, Seymour, 1989).

Housing shortage. California is in the midst of a housing shortage. Home prices in California are much higher than they are in other states. According to the Legislative Analysist’s Office’s (LAO) California’s High Housing Costs report, as of early 2015 the average home in California cost $437,000, which is more than double the average home price in the U.S ($179,000). With the high cost of homes, many Californians rent. However, the state’s housing shortage has pushed rents past the point of affordable. The LAO reports the state’s major metro areas added about 120,000 new housing units each year from 1980 to 2010. However, to have kept the state’s housing costs steady, California should have built 190,000 to 230,000 units per year. As a result, the state’s average monthly rent in 2013 was $1,240, nearly 50 percent more than the national average of $840 per month. In fact, in California’s most expensive cities — such as San Francisco — the average rent is more than double the state’s average rent. Amid high housing costs, taxpayers must make serious trade-offs such as longer commutes, postponing or foregoing homeownership, and in some severe cases, choosing between food or housing. While the state has recently enacted several measures that target the housing crisis — such as SB 2 (Atkins, 2017), SB 3 (Beall, 2017), and SB 35 (2017, Weiner) — it will take a while for the effects to be felt by taxpayers in the form of lower housing costs.

Mobile and manufactured homes. According to the 2018 Time’s article, Affordable Housing is Disappearing. These Mobile Home Residents Are Fighting to Protect Theirs, mobilehomes represent the largest sector of non-subsidized affordable housing in the United States, home to 22 million Americans with a median annual income of less than $30,000. However, since the 2008 financial crisis, and as an aging generation of mom-and-pop park owners cashes out, a new group of investors has bought up a growing share of the market, set on raising rents to increase returns. In July 2018, Blackstone Group, the world’s largest private equity firm, bought a portfolio of 14 mobile home parks in California and Arizona for $172 million. Combined with restrictive zoning nationally which has slowed the creation of new parks, both mobile and manufactured home parks as a source of affordable housing is slowly going away.

The author would like to provide a tax incentive to mobilehome park owners to sell their park to an organization who will maintain the park as affordable housing.

Proposed Law

Senate Bill 252 provides a capital gains exclusion to a qualified taxpayer that sells a qualified mobilehome park, as defined in existing law, to a qualified purchaser. A qualified taxpayer is a taxpayer that has held the qualified mobilehome park for 30 years. A qualified purchaser is any one of the following entities, which are defined in existing law: a local public entity; a qualified nonprofit housing sponsor; a resident organization; or a tribally designated housing entity. A qualified purchaser must record a deed restriction to maintain affordable rents for at least 30 years.

The exclusion must be certified by the Department of Housing and Community Development (HCD), and the taxpayer must provide HCD with a copy of an independent appraisal. HCD shall do all of the following:

• Develop and administer an application process that allows organizations to become qualified purchasers, and certify any organization that meets the criteria.
• Verify the amount of exclusion a taxpayer is eligible for using the independent appraisal

The exclusion is available for taxable years beginning on or after January 1, 2020, and before January 1, 2025. HCD may issue regulations to implement the bill. The Legislative Analyst shall submit a report on the effects of the exclusion to the Legislature no later than January 1, 2025.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “SB 252 would create an incentive for private mobilehome park owners to sell their park to their residents, a non-profit, an affordable housing entity or a local government. California is experiencing a severe housing crisis due to the lack of affordable housing. Since mobilehomes and manufactured homes are an important housing option in California, we must preserve the available mobilehome stock. Some non-profit and affordable housing partners are interested in maintaining affordable housing and purchasing parks from long standing business owners. There may be situations when park owners decide to retire, leave the industry and sell their parks. When this occurs, residents face steep rent increases or displacement, with few options of where to move. This bill would provide a deduction of capital gains tax to the park owner who may wish to leave the business and not want to displace the residents. This is a voluntary program for the park owners and not a forced sale. If the park owner sells their property at market rate, they would be eligible for 50% of their capital gains exclusion. If the park owner sells below market rate, they could be eligible up to 100% of capital gains exclusion. SB 252 helps protect this limited stock of affordable housing and keeps low-income families and our seniors off the streets.”

2. Tradeoffs. Existing tax law provides various credits, deductions, exclusions, and exemptions for taxpayers. This bill would create a new tax expenditure, resulting in less General Fund revenue. Without General Fund moneys, the government has less funding to pay for important public services such as education and public safety. As a result, the state will have to reduce spending or increase taxes to match the foregone revenue. The Committee may wish to consider whether SB 252 is worth the spending cuts and/or tax increases.

3. Windfall benefits. Tax expenditures generally do two things: First, tax benefits reward behavior that would have occurred without the tax benefit, referred to as “windfall benefits.” For example, some park owners will sell to a local public entity because the entities have raised enough capital to buy the park at fair market value. In these instances, the state receives no marginal benefit—since the taxpayer would have already sold the park to the preferred entity—and transfers money from purposes it would otherwise spend money on (ex. education, public safety, infrastructure, among others) to the park owner. Second, tax expenditures generate preferred activity. In other words, the exclusion provides sufficient incentive for park owners to sell to specified entities. A successful tax expenditure would lead to more preferred activity than windfall benefits. However, it is inconclusive as to whether SB 252 will drive more preferred activity or windfall benefits.

4. Broaden the reach. Currently drafted, SB 252 requires the taxpayer to have held the qualified mobilehome park for 30 years to qualify for the exclusion. By placing a minimum on the amount of time a taxpayer has to have held a mobilehome park, the state is limiting the amount of taxpayers that could qualify for the exclusion. To broaden the reach of the tax incentive, the Committee may wish to eliminate the minimum 30-year holding period to allow more taxpayers to qualify for the exclusion.

5. Let’s be clear. Currently drafted, SB 252 does not specify the amount of gain a taxpayer does not have to recognize. Instead, the bill asks HCD to confirm the amount of exclusion a taxpayer receives based on the independent appraisal and the other information provided. Calculating a tax gain can be complicated, and the amount of gain varies by property depending multiple factors such as the taxpayer’s original purchase price, whether the taxpayer completed any improvements, and the total cost of depreciation. HCD may not have the knowledge to be able to calculate the gain a taxpayer does not have to recognize. Additionally, when offering a tax incentive, it is important for taxpayers to know either the exact benefit, or how to calculate the benefit. It can be frustrating for taxpayers when they commit to an action, fill out the paper work, and go through the process only to find the tax benefit provided was less than they expected or the benefit was not worth the administrative process. The Committee may wish to amend SB 252 to specify how much gain a taxpayer can exclude if he or she decides to sell a qualified mobilehome park to a qualified purchaser.

6. Audit trail. When FTB receives a tax return, it is important for it to be able to verify the credits and deductions claimed. In other words, FTB must confirm that the taxpayer is legally qualified to claim the deductions and credits. If a taxpayer claims the gross income exclusion under SB 252, FTB does not have a way to verify the validity of the exclusion. FTB does not know the taxpayer sold his or her property to a qualified purchaser and that the purchaser wrote in a deed restriction of 30 years on that property. Since HCD is already required to verify the validity of the exclusion, it may want to give the taxpayer a certificate that FTB could ask the taxpayer for in case of audit. Thus, FTB would know that the taxpayer went through the correct process with HCD, and was legally qualified to claim the credit. The Committee may wish to amend SB 252 to require HCD to give the taxpayer a certificate that upon request, the taxpayer would provide to FTB.

7. Incoming. The Senate Committee on Governance and Finance is hearing SB 252 as the committee of second reference. The Senate Committee on Housing is scheduled to hear the bill at its April 30^th hearing.

Support and Opposition

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Support: California Coalition for Rural Housing; Claifornia; Rural Legal Assistance Foundation; Inc.; Community Housing Opportunities Corp; EAH Housing; Local Government Commission; Mutual Housing California; Peoples’ Self Help Housing; Public Law Center; Redwood Valley Tribe; Rural Community Assistance Corporation; Sacramento Neighborhood Housing Services, Inc Dba Neighborworks Homeownership Center Sacramento Region; Sierra Business Council; and Western Center on Law & Poverty, Inc.

Opposition: Unknown.

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SENATE COMMITTEE ON HOUSING

Senator Scott Wiener, Chair

2019 - 2020 Regular

Bill No: SB 252 Hearing Date: 4/30/2019

SUBJECT: Income taxation: exclusions: mobilehome park sales

DIGEST: This bill provides a capital gains exclusion to a taxpayer that sells a mobile or manufactured home park to a qualified purchaser if the purchaser maintains affordable rent, as specified.

ANALYSIS:

Existing law:

1. Establishes the "Mobilehome Parks Act", governing mobilehome parks, and the "Special Occupancy Parks Act", governing Special Occupancy Parks (such as RV parks), which establish requirements for the permits, fees, and responsibilities of park operators and enforcement agencies, including the Department of Housing and Community Development, and require the HCD to develop and enforce both the regulations and the laws.
2. Establishes the Mobilehome Park Rehabilitation and Resident Ownership Program (MPRROP). Authorizes HCD to make MPPROP loans to individual low-income residents of mobilehome parks that have converted to resident ownership, or to resident organizations that have converted or plan to convert a mobilehome park to resident ownership. These loans are intended to reduce the monthly housing costs for low-income residents to an affordable level.
3. Requires under Preservation Notice Law that to qualify as a purchaser of an assisted housing development, an entity shall be certified by HCD as capable of operating the housing facilities for its remaining life, as specified. HCD shall establish a process for certifying qualified entities and maintaining a list of entities that are certified.

This bill:

1. Provides that gross income shall not include gains from the sale or exchange of a qualified mobilehome park to a qualified purchaser as follows:
   1. 50% of the recognized gain for a qualified mobilehome park sold at market value;
   2. A percentage between 50% and 100% of the recognized gain for a qualified mobilehome park sold at a transacted price below market value. The percentage of recognized gain to be excluded shall be sufficient to offset the unrealized dollar value of a below market rate sale, as determined by an appraisal acceptable to HCD.
2. Defines “qualified purchaser” as the following:
   1. A local public entity, including a tribally designated housing entity;
   2. A qualified nonprofit housing sponsor;
   3. A resident organization;
   4. A tribally designated housing entity.
3. Allows HCD to adopt regulations as necessary and appropriate to implement this section.
4. Requires that, for taxable years beginning on or after January 1, 2020 and before January 1, 2025, gains from the sale of a qualified mobilehome park held by a taxpayer for a period of at least 30 years to a qualified purchaser, as defined, shall not be recognized. This exclusion shall only apply to the year for which the taxpayer seeks the exclusion and is confirmed by HCD.
5. Requires the exclusion provided by (4) above to only be allowed by a taxpayer that provides proof of an independent appraisal of the qualified mobilehome park to HCD.
6. Requires a qualified purchaser to comply with the following requirements: a) the purchaser agrees to own and operate a qualified mobilehome park and records a deed restriction to maintain affordable rents for at least 30 years, and b) the purchaser applies to and is approved by HCD, as specified.
7. Requires HCD to do the following:
   1. Develop and administer an application for organizations seeking to become a qualified purchaser.
   2. Confirm the information provided in an application for approval as a qualified purchaser.
   3. Designate any applicant as a qualified purchaser, as specified.
   4. Confirm the amount of exclusion to a taxpayer based on the independent appraisal and the information provided in the application for the qualified purchaser to which the taxpayer sold the qualified mobilehome park.
8. Requires the Legislative Analyst’s Office to submit a report to the Legislature, as specified, on the effects of the exclusion provided on the sales of qualified mobilehome parks in the state.

COMMENTS

1. Purpose of the bill. According to the author, this bill “would create an incentive for private mobilehome park owners to sell their park to their residents, a non-profit, an affordable housing entity, or a local government. California is experiencing a severe housing crisis due to the lack of affordable housing. Since mobilehomes and manufactured homes are an important housing option in California, we must preserve the available mobilehome stock. Some non-profit and affordable housing partners are interested in maintaining affordable housing and purchasing parks from long standing business owners. There may be situations when park owners decide to retire, leave the industry and sell their parks. When this occurs, residents face steep rent increases or displacement, with few options of where to move. This bill would provide a deduction of capital gains tax to the park owner who may wish to leave the business and not want to displace the residents. This is a voluntary program for the park owners and not a forced sale. If the park owner sells their property at market rate, they would be eligible for 50% of their capital gains exclusion. If the park owner sells below market rate, they could be eligible up to 100% of capital gains exclusion. [This bill] helps protect this limited stock of affordable housing and keeps low-income families and our seniors off the streets.”
2. Mobilehome parks. According to the 2017 Manufactured Housing Opportunity Profile: Data Snapshot, there are nearly 520,000 mobilehomes and manufactured homes in California, which accounts for nearly 4% of the total housing stock in the state. Nearly half of mobilehomes and manufactured homes are affordable to very-low income households, compared to just 18% of the state’s overall housing stock. Mobilehomes and manufactured homes are a significant source of affordable housing in a state with a desperate need for housing affordable in this affordability range.

A majority of the mobilehomes and manufactured homes in California are located in one of the nearly 4,900 mobilehome parks. Residents of these parks lease a site, or land, for their mobilehome or manufactured home and pay a monthly rent associated with their lease. Most of these parks are privately owned and residents are subject to cost increases and operating standards at the owner’s discretion. When a park owner decides to sell the park or convert it to another use, residents usually face rent hikes or displacement with few, if any, options to move.

1. Reward for selling parks and maintaining affordability. A capital gains tax is a tax levied on the sale of capital assets. For individuals, capital assets are generally anything a taxpayer owns for personal or investment purposes such as a home, stocks, even collectibles or art. For businesses, a capital asset is generally any item of value a business owns that is not resold in the ordinary course of business such as land, and buildings, among other things. Taxpayers incur a capital gain when a capital asset is sold for a profit. This bill provides a capital gains exclusion to a taxpayer that sells a mobile or manufactured home park to a qualified purchaser. If the taxpayer sells the park for fair market value, then the taxpayer does not recognize 50% of the gain. If the taxpayer sells the park for less than fair market value, the taxpayer does not recognize a percentage of the gain — between 50 and 100% — as determined by HCD. The purchaser must maintain affordable rents for at least 30 years. According to the sponsors, this tax benefit can be used in tandem with other state programs funding mobilehome parks and manufactured housing to encourage these housing units to remain affordable to the lowest-income earners in California.
2. Double referral. This bill is also referred to the Governance and Finance Committee.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

POSITIONS: (Communicated to the committee before noon on Wednesday,

April 24, 2019.)

SUPPORT:

California Coalition for Rural Housing (co-sponsor)

California Rural Legal Assistance Foundation (co-sponsor)
Community Housing Opportunities Corp
County of Tuolumne Board of Supervisors Housing Policy Committee
Mountain Housing Council of Tahoe-Truckee
Mutual Housing California
Peoples' Self Help Housing
Public Law Center
Rural Community Assistance Corporation
Western Center On Law & Poverty, Inc.

OPPOSITION:

None received.

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