It’s no secret that California homeowners have suffered greatly as a result of the mortgage meltdown and the deepest recession since the Great Depression, but proponents of a new real estate tax are holding foreclosure relief hostage. That’s not the kind of government people expect, but that is exactly what is happening at the State Capitol.
Legislative compromise is a critical part of effective government, but individual bills should always be considered on their own merits. However, this story of two bills – Senate Bill (SB) 30 and SB 391 – is the poster child for the wrong approach to governance.
The California Association of REALTORS® is sponsoring SB 30, which would correct an inequity when underwater homeowners are charged state income tax after a short sale. Federal and state laws view the mortgage debt forgiven in a short sale as income. In simpler terms, property owners that use a short sale are charged state income tax for money they never actually get. They lose money and their home, and then get a tax bill on top of it.
In recent years, REALTORS® have supported short-term relief for homeowners in state and federal law that keeps this “phantom” income from being taxed. In early January, President Obama signed into federal law an extension of mortgage debt tax forgiveness until the end of this year. Because similar state legislation has not yet passed, many short sellers are in limbo.
Struggling homeowners often only have two difficult alternatives: short sale or foreclosure. Having to pay taxes on income they will never receive can literally force them to select the foreclosure alternative where there is no tax liability. SB 30 would provide that tax relief and was moving toward passage with bipartisan support.
SB 30 is a bill that most would agree is necessary and non-controversial. A short sale is a better alternative to foreclosure. Passage is a “white hat” proposition. Sadly, there’s an unrelated “black hat” in the form of SB 391, which has nothing to do with short sales or helping underwater borrowers get relief. It creates a new $75 per document tax on real estate recordings to generate funds for affordable housing programs. There’s a heated debate as to whether or not the tax is necessary, not to mention the fact that any new tax proposal is going to be extremely controversial.
Affordable housing is important, but REALTORS® believe funding it at the expense of homeowners who record real estate documents is unfair. To be effective, without unduly impacting California’s real estate economy, affordable housing programs should be funded by the broadest base possible of California’s citizens. Moreover, there is not enough accountability in SB 391 to ensure that the funds will go to affordable housing as opposed to administrative costs, and there is no background to explain why the tax is $75 per document as opposed to $25 or $50. An arbitrary new tax on real estate transactions without strict accountability is a risky approach, even if traditional sales documents are excluded.
The State Senate has tied these two bills together meaning that even if SB 30 passes and is signed by Governor Jerry Brown, it won’t become law unless SB 391’s tax increase also is passed and signed. It’s a poison pill of the worst kind because legislators who want to help families could be forced into also voting for a tax they oppose.
SB 30 and SB 391 should be considered independently on their own merits. If lawmakers want to raise taxes, then have a vigorous and honest debate and then count the votes. Forcing families into foreclosure because they cannot afford higher income taxes is the wrong approach and undermines confidence in the legislative process.