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Why There May Be Almost Twice As Much State Tax Credit Money As Everyone Thought

May 10th, 2010 categories: Buying

$100 MillionAs  you’ll recall, back on Apr. 15,  I wrote that our state association, the California Assn. of Realtors, projected that the state’s new first-time and new-home buyer tax credits might all be gone within a matter of days, once May 1 arrived and eligible buyers started sending in their tax credit paperwork.

Well, it’s still too early to know for sure, but based on ‘early returns,’ CAR’s doom-and-gloom prediction may turn out to be rather exaggerated.

$100 Million Or $175 Million?

All along the state has been saying that only $100 million was allocated to fund the tax credit. But is that really true? Well kinda-sorta.

You see, buyers can only use the credit to offset actual taxes that are owed. Accordingly, some buyers won’t be able to use the full amount of the credit they’re eligible for.

So even though you might qualify for the full $10,000 credit ($3,333/year for three years), if your state taxes are only $1,800/year, then the state only has to give you $5,400. which means that the extra $4,800 they allocated to you can be given to another first-time buyer.

State lawmakers anticipated this when they approved the $100 million tax credit fund. That’s why every first-time home buyer application that’s approved only draws down the fund by 57% of what the applicant qualifies for.

Thus, if you qualify for the maximum credit and your application is approved, your $10,000 allocation only reduces the $100 million fund by $5,700.

If you do the math, that means the state can really continue to accept applications for up to $175 million in first-time buyer credits — or almost twice what everyone thought when the $100 million allocation signed into law by Gov. Schwarzenegger.

You Snooze, You Lose

Another oft-overlooked feature of the tax credit is that all applications must be submitted within 2 weeks of the close of escrow, WITH copies of the fully-signed purchase agreement and final closing statement.

Now, for most first-time buyers I’ve worked with, life becomes very chaotic right after escrow closes. They’re packing, moving, unpacking, and getting kids settled at their new schools.

But if you want the tax credit, in the midst of all of this upheaval, you have to stop what you’re doing and figure out where you put the purchase contract that you signed 6-8 weeks earlier as well as the closing statement you got the day escrow closed.

Or remember to get duplicate copies from your real estate agent. Then, you have to make sure the Franchise Tax Board receives it within two weeks of the date escrow closed.

Not two weeks just to get it postmarked, but two weeks for the state to receive it. So if you pop it in the mail on Day 14, you’re too late.

There are no grace periods and no appeals are allowed. If the FTB says they didn’t get it in time, you lose the credit.

Given how topsy-turvy life becomes for most people in the first few weeks after escrow closes, I have a hard time believing that every first-time buyer who qualifies for the state tax credit will actually submit the required paperwork within the first two weeks after escrow closes.

When you consider that only 1 out of every 5 consumers redeems a rebate they’re eligible for, I wonder how many first-time buyers will actually get their applications in on a timely basis.

I’d be willing to bet that somewhere between 30%-50% of those who are eligible for the credit will miss their two-week window to apply.

Perhaps the state will be more lenient than the law provides or maybe lawmakers will end up removing that 14-day submittal requirement.

If not, I stand by my 30%-50% fallout prediction, which could easily prolong the availability of state monies for eligible buyers.

Keep Track Of How Much Is Left

The Franchise Tax Board’s web site pledges to keep a running total of how much of the $100 million has been spoken for. As of May 4, it had only received 427 applications and had only debited $2.35 million from the fund.

CAR might ultimately be correct and perhaps the fund will indeed dry up very fast. But from where I sit, I think the money may last longer than the number-crunchers predicted.

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This entry was posted on Monday, May 10th, 2010 at 9:21 pm and is filed under Buying. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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