IRS worries latest woes to hit Gilroy homeowners

THAT WAS THEN, THIS IS NOW Benjamin and Olga Basurt and their neighbors, with the help of nonprofit South County Housing, built their new home on Festa Aglio Drive in Gilroy about a decade ago, pictured above. Now, those “sweat-equity” families may face h

GILROY—Fidel and Veronica Elizondo of Gilroy became first-time homebuyers when they were picked for a seemingly terrific deal for low-income families: a brand new, $430,000 house for only $230,000—if they agreed to a few resale conditions.

Fifteen years later, their dream has been a nightmare.

In 2010, they were in a class-action lawsuit because of what they said was shoddy construction, and when they tried to refinance their mortgage, all the restrictions they agreed to when they purchased got in the way.

Concrete has split, the roof leaked, linoleum peeled up and the seals on double pane windows failed.

Their small settlement amount was not even enough to replace the windows, they said.

Then, in August they learned that for 14 years they had been overbilled on property taxes, and they were not the only ones.

More than 200 others families whose low incomes qualified them to buy below-market-rate (BMR) homes from the now nearly defunct nonprofit builder South County Housing also received notices by mail from the Santa Clara County Tax Assessor that they had been overbilled and that refunds would be in the mail.

Now, after receiving the good news about refunds, the Elizondos and their neighbors in the Los Arroyos subdivision, along with five others built by SCH, face a new and potentially devastating financial blow whose impact is not yet entirely understood.

The questions are these: will the families have to pay federal income tax on that $7 million in refunds, averaging approximately $35,000 per family? And, if the families wrote off on their income taxes the property tax bills that are now known to have been excessive, must they amend all those tax returns? If so, will the IRS attach late fees and other penalties?

“We are going to be screwed,” Fidel Elizondo, 43, said.

The nursery worker predicted that he and his wife, a 39-year-old child care worker, will have to pay income taxes on the refund they have received so far as well as any future refund.

And while they said it’s good to know they are not alone in the predicament, it would be helpful if someone stepped in to guide them all though the process and answer their questions.

“I think that because all of this was through South County Housing, they are responsible enough to point a finger at; hopefully they will step in and find somebody to guide us,” Veronica Elizondo said.

Brian and Keysha Weintz, both 50, are in the same situation as the Elizondos, but the news from their income tax preparer had deeper, and potentially more expensive, implications. She told them they might have to amend their tax returns for the past 14 years, since buying their BMR in Los Arroyos in 2002.

That isn’t the only thing of concern, they said.

“We were kind of upset with the comment (by the county’s assessor’s office) that it is ultimately the homeowner’s responsibility” to know what tax to pay.

“We were all first-time buyers,” Brian Weintz said. “Assuming we all had similar paperwork, if there is a tax amount listed and professionals have put together the paperwork, there is no red flag for us to question.”

Keysha Weintz said that’s why none of the more than 200 BMR buyers ever questioned their tax rate.  

BMR buyers get a good price on their homes in exchange for agreeing to certain conditions, including never renting the house out. Also, they are not permitted to sell the house at market value. To keep the home affordable to lower-income families for decades, resale prices must also be below market rates.

And it is the lower sale value of the house that requires it to be assessed at a lower value than market rate homes for property tax purposes.

In the case of the Los Arroyos homes, no one notified the assessor that the homes were BMR when they hit the tax rolls over the past two decades or more.

The city of Gilroy monitors compliance with resale restrictions, and South County Housing often gave buyers lessons in homeownership and finances, but neither was required by law to alert the assessor—although the assessor’s office has received such notices about other BMRs built in the county, including in Morgan Hill and others in Gilroy, according to assessor Larry Stone’s office.

David Ginsborg, deputy county assessor, suggested the homeowners contact their CPAs and the IRS for answers about tax liability from refunds and amended returns.

“Don’t start making guesses, get the facts,” he advised.

Asked for his opinion, Gilroy CPA Paul Vanni said “A refund of property taxes falls under the definition of “recoveries” in the tax code. Generally, a recovery is treated as income in the year it is received. Therefore, the homeowner would not amend their prior tax returns.”

He suggested homeowners review IRS Publication 525, Pages 22-26 at  https://www.irs.gov/pub/irs-pdf/p525.pdf.

And Gilroy CPA John Blaettner opined that, “These people are going to pay tax on the refunds, the only disadvantage is if they get a large lump sum amount.” The reality, he said, is that (for years) they saved taxes so now they are just paying it back.

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