State offers tax break for new-home buyers

Via the San Francisco Chronicle

(02-26) 19:20 PST — California is offering a big carrot to people who buy brand-new homes in coming weeks: a $10,000 state tax credit for new-home buyers who close escrow starting Sunday.

With the housing sector in near-collapse and construction starts at record lows, home builders hope the credit helps them clear out inventory and kick-start their beleaguered industry.

“We have been in a depressed situation for three years now in our industry,” said Layne Marceau, president of Shea Homes’ Northern California division. “Our whole intent is to stimulate sales activity and ultimately to start housing projects again; to really get the economic engine moving.”

California home starts plunged from 208,000 in 2005 to about 66,000 last year. The industry says that has cost California $46 billion in economic output from 2005 to 2008, and resulted in the loss of 287,000 jobs in housing and related sectors.

The credit, included in the recently passed state budget, is available only for new homes that have never been occupied. Although new condominiums qualify, condo conversions – previously occupied apartments converted to condos – do not.

Jed Kolko, a research fellow at the Public Policy Institute of California in San Francisco, said the tax credit is a mixed blessing.

“It’s designed to boost the construction industry, which it’s likely to do,” he said. “But it ultimately encourages more new-home constructions, which is most likely to happen where there is more available land and less regulation – the areas where we have oversupply already.” Moreover, the credit could sap demand for existing homes, making it even harder for people who need to sell their homes to do so, he said.

The state allocated $100 million for the tax credit, available on a first-come, first-served basis, so only about 10,000 home buyers will receive the credit. Although technically the program runs until March 1, 2010, the money is likely to be exhausted much sooner. Starting Friday, the Franchise Tax Board will keep track on its Web site ( www.ftb.ca.gov). The credit is $10,000, or 5 percent of the home’s purchase price, whichever is less. With most new homes in California costing over $200,000, it’s expected that most qualifying buyers will get the full credit.

Home buyers will receive the credit spread out over three years as $3,333 annually starting when they file their state tax form in 2010 for the 2009 tax year. They must certify that they will live in the home as their principal residence for at least two years.

Two measures at the federal level also aim to encourage home purchases:

— First-time buyer tax credit. As part of the stimulus package, Congress implemented an $8,000 home-buying tax credit, available for both existing and new homes. It’s available only to first-time buyers, meaning those who haven’t owned a house in three years. It is limited to people with incomes of $75,000, or $150,000 for joint filers, but those earning slightly more may qualify for reduced credits. The purchaser must occupy the residence for three years.

Theoretically, someone could qualify for both the state and federal credits if they met the requirements of both programs.

Again, Kolko said, the credit is a double-edged sword. “While the tax credit may marginally help slow the decline in housing prices, it could encourage people who otherwise would not be able to afford a home to buy one,” he said. “As we all know, sometimes that works out and sometimes it doesn’t.”

— Raising conforming loan limits. Congress again temporarily raised the conforming loan limit to $759,750 as part of the stimulus package.

Lawmakers keep tinkering with the limits for mortgages that can be purchased by Fannie Mae and Freddie Mac. These conforming loans carry lower interest rates than jumbo loans. For years, the limits were under $417,000, so most home buyers in high-cost areas such as the Bay Area were stuck with the more-expensive jumbo loans. Last year, Congress temporarily raised the limit to $759,750 in high-cost areas, but it fell to $625,500 on Jan. 1. The new $759,750 limit is only for this year.