'Mark,' 'Jane' and the tax credit

Re: 'California expands $10K buyer tax credit' (March 25)

Dear Editor:

The California First-Time Buyer Tax Credit is designed to be an economic stimulus plan. Following is the typical scenario that the state is banking on:

Several years ago, Mark received an inheritance from his grandfather and decided to purchase a two-bedroom, one-bathroom condominium for $150,000. This home served him well, but three years ago he married Jane and last year they had a son.

Suddenly, there is barely room to turn around. So Mark and Jane have made the decision to buy a larger place. Little did they know that their move could help stabilize their state's economy.

Mark and Jane live in California, where the first year's property tax basis is the purchase price, due to the infamous Prop. 13. Thereafter, it (can rise) only two percent each year.

As time passes, longtime owners usually see that they pay substantially lower property taxes than their newer neighbors. (A declining market may give a temporary reprieve.)

In order to purchase a new home, Mark and Jane need to sell their condominium.

Cindy is a first-time buyer. She falls in love with their home and purchases it for $200,000. Cindy is excited because she qualifies to receive a tax credit of up to $10,000 for first-time buyers from California that will be spread over three years, or a maximum of $3,333 a year.

Now, Mark and Jane are ready to find their new home. Tom and Patty bought a three-bedroom, two-bath townhome 10 years ago for $250,000. Their three children are now all in school, so Patty has resumed her career as a nurse.

With the extra paycheck, Tom and Patty want to buy a four-bedroom home with a yard for their dog, Scooter. They are thrilled when Mark and Jane fall in love with their townhome ("It has a garage") and buy it for $350,000.

So now Tom and Patty are house hunting. Their search leads them to a lovely four-bedroom home owned by Hal and Sylvia, who bought it 15 years ago for $300,000. They strike a deal for $500,000 allowing Hal and Sylvia to look for their dream home.

With a property tax rate at 1 percent of tax basis (again Prop. 13), these three transactions will increase annual property tax revenues by $3,500, easily covering the annual first-time buyer tax credit. After three years it is all tax revenue.

But let's take this one transaction further. Hal and Sylvia have spent 20 years building a business from nothing. Their hard work has paid off and now they want to reward themselves by buying their dream home. They find a beautiful ranch home on one-third acre of land with a three-car garage, RV access, views, and a pool.

They immediately offer Linda, the original owner, $800,000. She takes the offer and cashes out to move to Colorado to be close to her son and grandchildren. She had purchased the place 30 years earlier at $300,000. This sale is now an additional $5,000 in the state's coffer.

Further, each of these transactions will create additional revenue that could be subject to taxation, i.e. sales commissions, escrow fees, title insurance premiums, and inspection fees.

However, it is important for the state to stabilize the property tax base if it is to stabilize our economy. In the process, California will be helping all of its homeowners retain value in their homes.

Jan McMillen
Century 21 Rolling Oaks
Thousand Oaks, Calif.

Dear Editor:

Like most states, our tax money has been spent foolishly, (with) no real accountability. The waste and political misuse is the real problem. It will only get worse until we get fiscal responsibility and true accountability on spending.

Jack Power
Power Real Estate
El Segundo, Calif.

***

What's your opinion? Leave your comments below or send a letter to the editor.

All rights reserved. This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this content without permission is a violation of federal copyright law.