BILL ANALYSIS Ó
AB 1736
Page 1
Date of Hearing: April 20, 2016
ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT
David Chiu, Chair
AB 1736
(Steinorth) - As Amended March 10, 2016
SUBJECT: Personal income taxes: deduction: homeownership
savings accounts
SUMMARY: Creates a "Homeownership Savings Account" (HSA) with
account requirements and limitations similar to those governing
Individual Retirement Accounts (IRAS). Specifically, this bill:
1) Excludes from gross income any income accruing to the
HSA during the taxable years commencing on or after January
1, 2017.
2) Allows a deduction equal to the amount deposited in the
HSA by a qualified taxpayer in any taxable year commencing
on or after January 1, 2017, not to exceed:
a) $20,000 for qualified taxpayers who are
married filing a joint return, a head of household,
and surviving spouses.
b) $10,000 for qualified taxpayers filing a
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return other than those specified.
3) Provides that amounts may be withdrawn to pay for
qualified homeownership expenses.
4) Specifies that any withdrawals for other than qualified
expenses shall be included in income of the payee or
distributee for the taxable year in which the payment or
distribution is made unless the payment or distribution is
used to pay for the homeownership savings expenses of a
qualified taxpayer who established the account.
5) Defines "Homeownership Savings Account" as a trust that
meets all of the following requirements:
a) Is designated as a homeownership savings
account by the trustee;
b) Is established for the exclusive benefit of
any qualified taxpayer establishing the account where
the written governing instrument creating the account
provides for the following:
i. All contributions to the account
are required to be in cash; and
ii. The account is established to pay,
pursuant to the requirements and limitations of
this section, for the qualified homeownership
savings expenses of a qualified taxpayer
establishing the account.
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c) Is, except as otherwise required or authorized
by this section, subject to the same requirements and
limitations as an IRA established under Section 408 of
the Internal Revenue Code, relating to individual
retirement accounts, and any regulations adopted
thereunder.
d) Is the only homeownership savings account
established by the qualified taxpayer.
6) Defines "Qualified homeownership expense" as expenses,
including a down payment or closing costs, paid or incurred
in connection with the purchase of a qualified taxpayer's
principal residence in California for use by that taxpayer
who established the homeownership savings account.
7) Defines "Qualifed taxpayer" as any individual, or
individual's spouse, who had no present ownership interest
in a principal residence during the preceding three-year
period ending on the date of the purchase of the principal
residence subject to the contribution allowed by this
section.
8) Defines "Trustee" as defined under a traditional IRA.
9) Takes effect immediately as a tax levy.
EXISTING LAW:
1) Allows various deductions and exclusions in computing
taxable income under the Personal Income Tax Law.
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2) Provides that amounts held in a traditional IRA are
generally included as income when withdrawn, except to the
extent the withdrawal is a return of nondeductible
contributions. Withdrawals are subject to an additional
state tax of 2.5% if it is withdrawn prior to age 59, with
some exceptions. Specifically, the taxpayer is not subject
to the early withdrawal tax if the withdrawal is used for
first-time homebuyer expenses of up to $10,000.
3) Specifies that the California Housing Finance Agency
(CalHFA) provide down payment assistance in the form of
deferred payment, low-interest; and junior mortgage loans
which are designed to reduce principle and interest
payments to make financing affordable for first time low
and moderate income homebuyers. In most cases, CalHFA
programs may be used in conjunction with other first-time
homebuyer programs, including programs offered by nonprofit
entities.
FISCAL EFFECT: Unknown
COMMENTS:
The most significant investment the state makes each year in
housing is through the mortgage interest deduction on primary
residences. The Franchise Tax Board (FTB) estimates that the
impact of the mortgage interest deduction on state revenues for
2016-2017 will be $5 billion dollars. In addition to the
mortgage interest deduction homeowners receive on their primary
residence FTB estimates the mortgage interest deduction for
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second homes for 2016-2017 will result in an estimated $360
million in revenue loss. Funding for affordable housing
production and programs to assist lower income families become
homeowners has been largely eliminated in the past few years.
Proposition 46 of 2002 and Proposition 1C of 2006 together
provided $4.95 billion for affordable housing. These funds
financed the construction, rehabilitation, and preservation of
57,220 affordable apartments, including 2,500 supportive homes
for people experiencing homelessness, and over 11,600 shelter
spaces. In addition, these funds have helped 57,290 families
become or remain homeowners. Nearly all of these funds have been
awarded.
The California Housing Finance Agency (CalHFA) operates the
California Homeowner Downpayment Assistance Program (CHDAP) and
provides homebuyers between 3% and 6% in downpayment assistance
secured as a second mortgage on the home. The program operates
as a revolving loan and when a home is sold CalHFA is repaid
allowing the funds to go to another homebuyer. There is
approximately $150 million available in CHDAP at this time. The
program can provide downpayments to individuals that make up to
120% of the area median income (AMI) and just recently raised
its income limits to 140% of AMI in high cost areas. CalHFA
operates independently of the state General Fund and derives the
funding for its downpayment assistance program from the sale of
bonds.
This bill allows taxpayers to contribute $20,000 a year, for a
married couple filing joint returns, and $10,000 for a single
filers to a HSA. The contribution to the HSA is not subject to
income taxes until the taxpayer withdrawal's the funds to use
toward the purchase of a home. Taxpayers who have not owned a
home within the last three years would be eligible for the HSA
program.
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Purpose of this bill: According to the author "California is in
the midst of a housing crisis. There is a substantial lack of
new home construction: according to the California Homebuilding
Foundation, the number of annual housing permits in 2015 was
similar to the slowest years in the 1980s and 1990s. This
shortage is hitting the affordable and middle-class housing
markets alike. AB 1736 allows Californians to utilize
"Homeownership Savings Accounts" to save more of their own money
for use on their first down payment and closing costs. While an
increased supply of housing is needed, this bill will assist
them in defraying the sizable costs of living in California and
help empower them to achieve homeownership in the near term."
Agreements in suppor t: According to the Building Industry
Association, data recently released by Beacon Economic shows
California ranks 49th in homeownership and last in overall
housing affordability. "While an average California home cost
$440,000, homebuyers need additional tools to attain the
American Dream. As the state grapples with a housing
affordability crisis, AB 1736 will allow first-time homebuyers
to save more of their own money in order to attain the benefits
of homeownership."
Arguments in opposition : According to the California Tax Reform
Association, "this bill provides little or no help to those
struggling to buy a home in California's expensive housing
market. By allowing a deduction, it provides the greatest
benefits to those who are better off, that is, are in the higher
tax brackets in our progressive tax system. In fact, since it
has no income limitation it merely provides a tax shelter for
those with substantial income, but even with such a limitation
it would still provide disproportion benefits to the well-off
who can save the most and are at least in need of help in buying
a home. "
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Staff comments:
Unlike CHDAP the funding for this program would come from a
reduction in state revenues and would be a one-time investment
in one individual rather than function as a revolving loan fund.
The committee may wish to consider if this is the right
investment considering the affordable housing challenges facing
the state. The committee may wish to consider whether there
should be some income limitation on those who can qualify for a
HSA to focus this bill on lower income individuals.
The potential revenue loss to the state as a result of this bill
are unclear. Should this bill pass out of this committee it will
be referred to the Committee on Revenue and Taxation who can
determine the cost. The author has indicated a willingness to
amend this bill to reduce the cost by revising how and when
taxes can be applied to the HSA. The committee may wish to
request that the author address those issues in the Committee on
Revenue and Taxation.
Committee amendments:
The committee may wish to consider the following amendments:
Only allow taxpayers that make up to 80% of area median
income (AMI) qualify to create a HSA. If a taxpayer's
income exceeds 80% AMI in any given year they cannot
contribute to the HSA.
Change the definition of "first time homebuyers" from
taxpayers that have not owned a home within the last three
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years to a taxpayer who has never owned a home.
Double referred : If AB 1736 passes this committee, the bill
will be referred to the Committee on Revenue and Taxation.
REGISTERED SUPPORT / OPPOSITION:
Support
California Association of Community Managers
California Association of Realtors
California Building Industry Association
California Counsel for Affordable Housing
California Credit Union League
County of San Bernardino
Educational Community for Homeowners
Housing Authority of the County of San Bernardino
League of California Cities
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Silicon Valley Leadership Group
Western Manufacturing Housing Communities Association
Opposition
California Tax Reform Association
Analysis Prepared by:Lisa Engel / H. & C.D. / (916) 319-2085