San Diego, CA – A new Assembly Bill is proposing to implement a CA flip tax on house flippers who sell within three years of homeownership.
New CA Flip Tax Bill to Impose 25% Gains Tax on House Flippers Who Sell Properties Within Three Years of Homeownership
According to a California state lawmaker, house flippers and short-term investors are hurting the CA real estate market and contributing to the growing housing crisis. It is no longer news that the US is experiencing a shortage of housing supply, which is driving prices up.
According to Assemblymember Chris Ward, real estate investors who are in the market for investment properties to fix and flip are adding to the country’s worsening housing problem. This type of investment venture is keeping the average American from being able to access affordable homes.
To put it into perspective, there have already been numerous cases where would-be first-time homebuyers were beaten to the punch by short-term investors offering cash payments. These investors typically resell the properties at inflated prices after rehabilitating them.
Case in point, first-time homeowner Trisha Cortez, a healthcare worker with good credit, said she was able to secure a loan easily. The main challenge was looking for a property to buy that matched her criteria. While she was offering slightly above-market prices, investors with all-cash offers would swoop in and claim the property. According to Cortez, she had to go through 33 rejections before she was finally able to buy a house.
Fixing and flipping houses is nothing new. It’s been around for quite some time, helping many Americans generate additional income. For the uninitiated, the process basically involves looking for distressed and undervalued properties and rehabilitating them to resell for a profit. Generally, this is beneficial for both buyers and sellers. For obvious reasons, sellers get to go to the bank with a substantial amount of profit. On the other hand, homebuyers receive properties that are in great condition, which saves them the hassle of working on its updates and repairs.
Related: The Complete Guide to Flipping Houses in California
The California Housing Speculation Act
The new CA Flip Tax bill, which was introduced in March 2022, is designed to help alleviate the housing problem in California and make homeownership more affordable, thus more attainable, for the average Joe and Jane.
Assembly Bill 1771, also known as the California Housing Speculation Act, aims to change the California real estate landscape by making certain adjustments to its tax policies. The adjustments are intended to minimize the quick reselling of properties like single-family homes. The authors and supporters of the bill hope that it will discourage short-term investors from taking advantage of the law of supply and demand in a market with very low inventory.
Ward, who hails from the 78th District, proposes an additional 25% tax on the gain from the transaction, which will start on January 1, 2023. He says that a study on the 2021 US housing market shows that investors bought a record $63.6 billion worth of real estate properties. Single-family homes made up nearly three-quarters of the total number of houses bought by investors last year.
Ward also says, “We’ve also seen this influx of short-term investors trying to get into the market.” These investors, whose numbers include out-of-state investors, have also been found to outbid Californians with offers of all-cash payments. Consequently, it has driven up the already high CA property prices.
However, despite the obvious low inventory, California still experienced a 26% profit growth from last year, which isn’t sustainable. Norm Miller, a University of San Diego real estate professor, says that the CA Housing Speculation Act may help but may not be actually felt by many as the state’s tax laws are still heavily in favor of investors.
The CA flip tax bill will implement a 25% tax on profits until the third year of homeownership. The rate will drop to 20% the following year and will continuously decrease until it is eliminated in the seventh year.
Since most California property owners keep their homes for 10 to 15 years, AB 1771 will not affect individuals who buy properties for personal use. Of course, certain buyer categories, such as first-time buyers and military homeowners, will be tax-exempt.
The taxes collected from short-term investors who buy income properties, whether they’re on the MLS or are off-market properties, will be used to fund essential state projects. Such projects include, but are not limited to, city development projects, educational projects, and affordable housing projects.
The main objective of the CA flip tax bill is to disincentivize house flipping to give the average American home buyer a better chance at homeownership.
Related: How to Lower Property Taxes: 10 Tips and Tricks
How Does The Bill Affect Real Estate Investors?
Unlike home buyers who purchase properties for personal use, the bill will significantly impact real estate investors – specifically the ones who are in the fix-and-flip business. With the crackdown on investors with short-term rental properties and the proposed legislation now, real estate investors need to think twice about investing on the West Coast.
Perhaps it might be a good time for house flippers to consider other forms of real estate investing, especially when the bill takes effect in 2023. Investors who choose to bring their money to CA can start looking at other options. They can find investment properties to rent out as traditional rentals. Also, they can learn how to buy an Airbnb property and rent it out in areas where they are comfortable with the restrictions on short-term rentals.
People who are considering getting into the rental property business will need to add rental property analysis to the tasks they need to accomplish. It is part of the feasibility study they need to make if they are to start a traditional or vacation rental business.
The good thing about the above option is that real estate websites, like Mashvisor, are easily accessible online to help investors find a profitable property and analyze its income-generating potential. Mashvisor not only allows investors to locate the best properties in practically all markets in all 50 states, but it also connects them to trustworthy local real estate agents. It also includes a massive database that is regularly updated so investors get accurate market information and reliable rental data for their research and analysis.
To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo.
Related: The Complete Guide to Finding the Perfect Airbnb Investment Property in 2022
The Bottom Line
There is still much left to be discussed about the CA Flip Tax Bill and how it can help alleviate the state’s housing shortage. In the meantime, it would be wise for short-term investors to look for other profitable options if they intend to keep doing business on the West Coast. Rental property investments might be a good option for them to consider at this point. Either way, it would do them well if they start preparing while waiting for the bill to take effect.
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