Californian Tax Credit Proves Big Success

by Leroy Baker, Tax-News.com, New York

29 July 2009

The Californian tax board has called a halt to a new tax credit scheme designed to encourage home buyers back to the market and boost the construction industry after it proved a huge success.

The State of California Franchise Tax Board (FTB) stopped accepting new applicants for the credit on July 3 after receiving USD100m worth of applications from 12,000 prospective home buyers.

The new tax law allocated USD100m of tax credits to roughly 10,000 buyers who, on or after March 1, 2009, purchased a qualified principal residence that had never been occupied. This credit is equal to the lesser of 5% of the purchase price or USD10,000. The buyer must reside in the new home for at least two years immediately following the purchase date.

To ensure that enough valid applications were received so that the full amount of money available for the tax credit could be allocated, the FTB accepted 12,000 applications. However, the FTB will only issue approved credit certificates until the USD100m is exhausted. The credit is being allocated on a first-come, first-served basis.

The tax credit has been embraced enthusiastically by the state’s construction trade, and the California Building Industry Association said that total housing starts saw a “significant increase” in June when compared to May as a result of new demand.

“This is welcome news,” said Robert Rivinius, CBIA’s President and CEO. “Builders are reporting that the demand spurred by the tax credit has helped clear out new-home inventories and we are now seeing an increase in housing production as builders ramp up projects to meet the demand,” he added.

According to Rivinius, building a new home in California generates on average about USD16,000 in tax revenues to the state treasury and creates an additional two to three jobs. This, he argues, is justification for extending the scheme, despite the fact that the state is mired in one of its regular budget crises. The state assembly is, however, considering new legislation that would allow more people to apply for the credit.

“Getting an extension on the credit would be a win for the State and the entire economy,” Rivinius said.

According to statistics compiled by the Construction Industry Research Board, builders pulled permits for 3,446 total housing units in June, up 17% from May. Permits for single-family units totaled 2,772 units, up 20% from May, and was the largest single-family total since July of last year.

“The increase in single-family construction over the past couple of months has shown that the popular program is a success and we’d like to keep it going,” Rivinius added.

However, according to the Wall Street Journal, the Californian housing tax credit may not be totally exhausted just yet. Because the credit is non-refundable and is spread out over three years, if the home buyer owes less than USD10,000 in taxes over the same time-frame, he won’t be fully reimbursed. This means that homebuyers will use up just 70% of the available credits, leaving enough to cover more than 4,000 home purchases, the report said.

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