California Assembly Bill 1771, also known as the California Flip Tax Bill, has garnered a lot of attention from home flippers. As the name suggests, AB 1771 would add a 25% capital gains tax on nearly every home that was bought and sold within three years of purchase. If passed, the law would take effect on January 1, 2023.
AB 1771 would apply to almost all investors in California residential properties, including those who purchase homes to fix them up and then flip them for a profit. While the additional tax would decline in annual increments afterward, this could be a game-changer for the flipping industry.
Those classified as a “Qualified Taxpayer” would be subject to the new law. Those exempt include any active duty military personnel or a deceased person when the property was sold or exchanged following their death.
There are some exemptions to be aware of. These include:
Multiple Unit Affordable Housing: This includes properties that have more than one residential unit, deed restrictions requiring 15% or more of the units to be classified as “affordable housing,” and deed restrictions that were recorded within three years of the exchange or sale of the property, which only applies to the first sale.
Subdivided Properties: When a Qualified Taxpayer is the recorded owner of a subdivided property, that split property would be exempt. This is as long as the other portions of the subdivided property have not been sold.
First Primary Residence: If a Qualified Taxpayer’s home is the first property that they have owned, it will be exempt from AB 1771. Additionally, the property must have been used as their primary residence since the initial purchase.
Non-Residential Properties: This includes property that is either not zoned or not suitable for residential use.
Other Affordable Housing: Properties with deed restrictions that require the property to remain designated as “affordable housing” are also exempt.
Properties Exempt from Transfer Taxes: If a property is part of a non-profit organization, for example, and transfer taxes do not apply, that property would be exempt from this tax.
Designated Open Space: Specific areas that have been designated as open space, including beaches, forest lands, military land, parks, wildlife preserves, etc., will also remain exempt.
All tax revenue would benefit the Speculation Recapture Community Reinvestment Fund. The bill has yet to receive significant support in the Assembly; however, it’s worth keeping an eye on as the year presses on.
I’m a local real estate professional with decades of experience in the Pasadena area. I am available to assist you in buying or selling a home, so please get in touch with me if you would like to schedule a time to discuss your needs. Take care!
I am a seasoned real estate professional with decades of hands-on experience in the Pasadena area. My extensive background in the field, coupled with a deep understanding of legislative developments, positions me as a reliable source of information regarding the California real estate landscape. Over the years, I've navigated the intricacies of the market, staying attuned to legal changes and their potential impacts on the industry.
Now, let's delve into the specifics of the California Assembly Bill 1771, widely known as the California Flip Tax Bill. This legislation has become a focal point for home flippers, and its potential implications demand a nuanced understanding.
AB 1771 proposes the implementation of a 25% capital gains tax on homes bought and sold within three years of purchase. This tax, set to take effect on January 1, 2023, has the potential to significantly reshape the dynamics of the flipping industry in California.
The bill casts a wide net, encompassing nearly all investors in California residential properties, including those who engage in the common practice of purchasing homes for renovation and subsequent profit through resale. While the initial 25% tax rate is substantial, it is noteworthy that the tax would decrease in annual increments after the three-year threshold.
Key to the understanding of this legislation is the concept of a "Qualified Taxpayer." Those falling under this classification would be subject to the new law. However, certain exemptions exist, demonstrating the nuanced nature of this proposed tax.
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Exemptions for Active Duty Military Personnel and Deceased Persons: Active duty military personnel and individuals who sell or exchange property following their death are exempt from AB 1771.
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Multiple Unit Affordable Housing: Properties with more than one residential unit, meeting specific criteria for affordable housing, and with related deed restrictions recorded within three years of the property exchange or sale are exempt. This applies only to the first sale.
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Subdivided Properties: A Qualified Taxpayer's ownership of a subdivided property is exempt, provided the other portions of the subdivided property have not been sold.
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First Primary Residence: The first property owned by a Qualified Taxpayer, used as their primary residence since the initial purchase, is exempt from AB 1771.
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Non-Residential Properties: Properties not zoned or suitable for residential use fall outside the scope of this tax.
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Other Affordable Housing: Properties with deed restrictions mandating the property's designation as "affordable housing" are exempt.
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Properties Exempt from Transfer Taxes: Certain properties, such as those belonging to non-profit organizations where transfer taxes do not apply, are also exempt.
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Designated Open Space: Areas designated as open space, including beaches, forest lands, military land, parks, and wildlife preserves, remain exempt.
It's crucial to note that the generated tax revenue would contribute to the Speculation Recapture Community Reinvestment Fund. While the bill has not yet gained significant support in the Assembly, its trajectory remains uncertain as the year progresses. As a real estate professional deeply entrenched in the local market, I am available to provide further insights and assistance for those navigating these potential legislative changes. Feel free to reach out to discuss your real estate needs.
