What Is California’s 25% Speculation Tax? What Will It Mean For Investors?

speculation tax

Investors in California have had a tough time over the last 24 months due to COVID-19 lockdowns and eviction moratoriums but if the proposed ‘speculation tax’ is approved, this could make real estate investing in California even more difficult.

What Is The Speculation Tax?

The California Speculation Act carries the following provisions:

  • Homeowners would be taxed up to 25% on capital gain if they sell their home within three years of purchase.
  • The tax applies to all “Qualified Taxpayers”.
  • Applies to most residential properties with few exemptions.
  • First-time homebuyers and affordable housing units are exempted.
  • Properties sold within three years are subject to a 25% tax. After three years, the rate declines by 5% each year until seven years have passed.
  • Collected taxes would be put towards community investment, with 30% designated for affordable housing.
  • If passed with a 2/3 vote in the Assembly, the bill would become law on January 1, 2023.

What’s The Story Behind It?

California’s housing market is notoriously expensive. San Francisco usually charts at number one for the most expensive real estate market in the U.S. State tax rates are also among the highest in the nation.

AB 1771’s intention is to lower home prices by preventing investors from taking advantage of the market with cash offers. According to the bill’s sponsor, Chris Ward, the Act will dissuade institutional investors who buy up homes with cash and flip them at inflated prices soon after.

“We’ve heard of people getting into their first home getting beat by cash offers,” Ward said at a news conference. “When investors fall out of the buying pool, that will give regular home buyers a chance to buy a home,”

For Ward, prices are a major problem. As a representative of San Diego, historically one of the more affordable spots in California, he’s overseen skyrocketing real estate appreciation that’s put San Diego on par with San Francisco, a voting issue that does not bode well for him.

Unfortunately for Ward, his bill is being faced with significant opposition.

According to detractors, the main issue facing California’s real estate crisis is the severe lack of housing supply. Demand has been through the rough over the past few years and supply has been exceptionally slow in catching up.

California housing starts in 2021 totaled about 120,000. That’s a slight uptick from 2020, but right on par with the last four or so years. It’s way down from 2004 or 1988 levels though, where total units rose well above 200,000. The state is also below its construction goals, which is targeted to fall around 180,000 units per year.

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If you’re a real estate investor, or homeowner who is renting their property, and you want quality property management, contact us today at (209) 572-2222 or click here to connect with us online.