Governor Arnold Schwarzenegger signed into law today a renewal of the $10,000 home buyer tax credit for first time buyers of existing homes and extended the law including any buyer of newly constructed homes. The home builder lobby and the California Association of Realtors predictably hailed the move.

California’s New Home Buyer Tax Credit

The new law, AB 183, carves out $200 million to fund the tax credits for the two groups of buyers giving each group half of the funds.

This new law is clearly an attempt to create jobs and prop up the housing market in California. This is not a bad idea in the short run in my opinion since California is still one of the worst states in terms of foreclosures and shadow inventory.

However, we must be careful not to incentivize the home builders too much possibly spurring the creation of too much inventory. Obviously, the desire for more jobs runs up against the desire to have home prices stabilize. California needs home prices to fall like it needs a hole in the head. Needless to say, creating more housing when millions of foreclosed bank-owned homes are still yet to hit the market is flirting with this unintended consequence.

Qualified Home Buyer Requirements

From the legislation itself, I gleaned the following requirements…

1. Must buy between May 1, 2010 and December 31, 2010 or December 31, 2010, and before August 1, 2011

2. The home buyer must not be a dependant

3.The home buyer must buy a home that does not belong to a relative

4.”First-time home buyer” means 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 qualified principal residence.

5. If the taxpayer does not occupy the qualified principal residence as his or her principal residence for at least two years immediately following the purchase, any remaining unapplied credit shall be canceled and any previously applied credit shall be recaptured, and the taxpayer shall be liable for any increase in tax
attributable to the recapture of any credit previously allowed under this section.

6.No credit shall be allowed under this section unless the taxpayer submits to the Franchise Tax Board, within two weeks after the date of the purchase of the qualified principal residence, a copy
of the properly executed settlement statement and either one of the following:
(A) If the qualified principal residence has never been occupied, a certification by the seller, made under penalty of perjury, that the residence has never been previously occupied.
(B) If the qualified principal residence is purchased by a taxpayer who is a first-time home buyer, a certification from the taxpayer, made under penalty of perjury, that he or she is a first-time home buyer.

So make sure if you are buying a California home to follow the rules and get your tax credit. This government bribe combined with historically low interest rates does produce a huge incentive to buy now if you live in California.

Just be careful…

Shop for a great deal. Look at bank-owned properties, pre-foreclosure homes, and existing homes if you are a first time buyer as this will help you and the state in the long run. Buy in neighborhoods that have already hit bottom and have nowhere to go but up.

Stay away from condo’s and townhomes, as you get no land value with your purchase. Stick with single family houses. In the long run, they will appreciate more once inflation takes off.

Yes, this will take a little work…but it will be worth it and you’re getting paid by Arnold to do it!

Good Luck!

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