Assembly bill would tax house flippers, those who sell homes a few years after purchase

House flippers could be taxed 25% of their profits under the California Speculation Act, a bill introduced by Assemblyman Chris Ward, D-San Diego.

Assembly Bill 1771 is intended to discourage real estate speculation, which Ward says drives up home prices as equity investors outbid single-detached home buyers.

“We’ve heard of people moving into their first homes getting beaten up by cash offers” from investors, Ward said at a press conference Wednesday at the San Diego County Administrative Center.

These investors typically resell the properties soon after at inflated prices, fueling competition for limited units and driving up market prices for comparable homes, he said.

The bill, introduced last week, would impose a 25% tax on profits from a home resold within three years of purchase.

After the third year, this rate would fall to 20% and decrease each year thereafter until it is eliminated after seven years.

Most California homeowners hold on to their property for 10 to 16 years, Ward said, so that wouldn’t affect most people buying a home for personal use. Certain categories of buyers, such as first-time buyers and the military, would be exempt from taxes.

Taxes collected from short-term sales would be distributed to cities, schools and affordable housing funds, Ward said.

The aim is to create a deterrent effect for equity investors, freeing up homes for people buying for personal use.

“When investors move out of the buy pool, it will give repeat buyers a chance to buy a home,” Ward said.

Housing prices are up about 20% statewide in 2021, Ward said. In San Diego, they jumped 26% last year, earning the area the accolade of least affordable metro area in the nation as housing prices outpace incomes.

Meanwhile, the share of homes being bought by investors rather than families has increased in recent years, the bill says.

First-time homeowner Trisha Cortez spoke at the press conference, describing her recent home-hunting experience in the San Diego area. A healthcare worker with good credit, she said she was easily able to get a loan, but the search was a grueling process until she bought a condo in Talmadge.

“I regularly offered prices above asking prices, but cash buyers would rush in and take the property,” she said. “I was turned down 33 times before I got housing.”

Housing production is lagging far behind demand, said Alan Gin, an economics professor at the University of San Diego. The region needs about 17,000 new homes a year, but in the past three years it has produced roughly half of that – 8,216 homes built in 2019; 9,472 built in 2020 and 9,358 in 2021, he said.

Other real estate experts said that was the real problem. Despite efforts to curb real estate speculation, there will be no relief for homebuyers until more homes are built, said Lori Pfeiler, CEO of the Building Industry Association of San Diego County.

“While we appreciate Chris’ goal, it is ultimately a supply issue,” Pfeiler said. “We don’t have enough houses to sell, inventory is low and anyone thinking of selling their house just won’t sell their house; they will figure out how to stick to it.

Pfeiler said lowering fees and reducing regulatory barriers to housing construction would be more effective in lowering prices.

Gin said San Diego is such a desirable location that real estate speculation would likely continue even with increased domestic production.

Gary London, property economist and senior director at London Moeder Advisors, warned that while the bill could ease pressure on buyers, it would limit options for sellers. He said most institutional investors target mid-priced homes rather than luxury homes, so the worst-hit sellers would be middle-income homeowners rather than the wealthy.

“I don’t like it, because it’s effectively an attack on sellers’ property rights,” he said.

Pfeiler also said the bill could inadvertently reduce geographic and economic mobility by preventing people from selling a home due to job change or other economic necessity, she said.

“Chris is looking for bold ways to help us deal with the housing crisis, but on many fronts it will limit supply and limit people’s choices about what work they take and where they settle,” she said.

Ward said the bill could be amended to exclude primary residences, so people who buy homes for their own full-time use would not be taxed.

“We will continue to seek out those groups of people who should be exempt,” he said. “The intent of this bill is not to penalize everyone but to deter activities that drive up prices for everyone.”