WEST SACRAMENTO – After long days of representing Orange County residents at the state Capitol, Assemblyman Van Tran returns here, to a gated community where he lives with wife and kids in a 2,658-square-foot house with two fireplaces and a three-car garage.

Tran’s wife and two young children call this place home. His wife has declared this her principal residence for tax purposes. But this isn’t Tran’s “home.”

State law says legislators legally reside wherever they’re registered to vote, which in Tran’s case is 418 miles south, at his parents’ house in Westminster. The law also says that if legislators live far away, they’re entitled to a daily, tax-free allowance when they work at the Capitol.

These laws have enabled Tran to enjoy every aspect of home life while also collecting more than $137,000 in allowance for being away from home during the legislative session.

This is an unseen corner of legislative service, where overlapping laws allow savvy politicians to leverage their tax-free allowance to buy homes, secure tax deductions and sometimes pocket hundreds of thousands of dollars in profit. This legal patchwork has created a benefit legislators in other states rarely see and blurred the lines between allowance and income. (Click here to see how the process worked.)

While most state lawmakers use their allowance to rent a place in the Sacramento area, an Orange County Register review of land records, financial statements and tax records found:

•Lawmakers, like former Assembly Speaker Fabian Nunez, who declared their homes in Sacramento as their principal place of residence on tax records and then collected tax-free allowance to cover their living expenses at the state Capitol as if they were away from home;

•Lawmakers like Orange County’s Jose Solorio and Tom Harman, who used their allowance to help pay for second homes and then used those homes to secure additional income tax deductions; and

•Lawmakers who sunk their per diem into Sacramento homes and then resold them for six-figure profits when they were termed out of the Legislature.

And they all appear to have done so legally.

“This is a state where its own financial house and its broader economy is in disarray and yet there’s still a major financial advantage and loopholes to politicians wily enough to take them,” said Doug Heller, executive director of Consumer Watchdog, an observer of California government. “It should shake any taxpayer to see their lawmakers work so many angles to get rich off their public service.”

Lawmakers say they’re just following the rules made for them. They acknowledge their untaxed allowance may appear lavish, but they insist it’s really just a modest necessity – even when much of their lives are now based in Sacramento.

“You still have financial commitments for two homes,” said Tran, a Republican now seeking a seat in Congress.

Some lawmakers say they bought homes in Sacramento simply because they didn’t want to waste the money on a rental. Others acknowledge they bought as an investment. Several admit it’s made them richer. But lawmakers deny the system has been stacked in their favor and say whatever benefits they receive are comparable to those in the private sector. They say they’re just trying to be smart with their money.

“But see, that’s the point. It’s not their money. It’s the taxpayer’s money,” countered Dawn Wildman, co-coordinator of the California Tea Party Patriots. “I understand that this is legal. That doesn’t make it right.”

DAY BY DAY

California began covering the living expenses for state lawmakers in 1850, the year it became a state. The idea is to make serving in the Legislature affordable. The allowance is intended to cover the costs of maintaining a second home near the Capitol.

By the mid-1970s, however, questions arose at the federal level over how these payments should be handled. The Internal Revenue Code allows deductions for expenses incurred while traveling away from home on business. But for a state lawmaker who maintains two homes and conducts business in both the district he represents and at the state capitol, what constitutes being away from home on business?

The solution was a special provision inserted into the federal tax code. It allows state legislators in any state to choose which home is their primary place of business. If they choose their district, and their district isn’t located near the state capitol, they may receive a tax-free allowance for living expenses for every day of legislative work. The allowance is known as a per diem, Latin for “per day.” (Click here to see the ins and outs of legislative per diem.)

Today, California state lawmakers receive a per diem of $141.86 per day, which ranks near the top among states. Alaska state lawmakers are eligible for $189 a day. Tennessee lawmakers, $185. Georgia, $173. Pennsylvania, $154.

But what makes our lawmakers unique is the number of billable days they rack up. Alaska had 90 in 2009. Georgia, 40. Tennesse, 45. Pennsylvania, about 100.

Many California lawmakers were eligible for more than 200 days of per diem in 2009 and many netted more than $37,000 in tax-free money last year, when the per diem was as high as $173 per day. All told, the state spent more than $4 million on legislative per diem in 2009. And that’s on top of state lawmaker’s annual salaries, which were cut from $116,208 annually to $95,291 in December.

The unusual combination of high per diem and a large number of billable days has made investing in Sacramento’s real estate market nearly irresistible for California’s legislators. Until recently, it’s been highly profitable.

SELLING AT A PROFIT

Once the owner of several car dealerships, Orange County’s John Campbell already was a rich man when he joined the State Assembly in 2000. So it should come as no surprise that Campbell was smart about choosing where to spend his per diem.

Four months after winning the GOP primary, and still four months before he would win the general election in his overwhelmingly Republican district, Campbell purchased a new home off of a lake in the north part of Sacramento. He apparently paid for the $300,000 home in cash. No mortgage was recorded.

Campbell went on to serve four years in the Assembly and one year in the State Senate before joining Congress in late 2005. Over those five years he collected $132,930 in tax-free per diem. Two days after being elected to the U.S. House of Representatives, he sold his Sacramento home for $665,000.

Assuming his entire per diem was applied to the cost of the home, Campbell appears to have invested only $167,070 of his own money into the house. His profit off of its resale: $497,930. Campbell’s office did not respond to requests for comment.

“You almost want to applaud them for their wise use of the per diem,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association, who defended Campbell’s transaction as prudent investing.

But not all see it that way.

“Clearly this is an abuse of the system,” said Kathay Feng, executive director of California Common Cause, an advocate for government reform. “It really runs counter to what they should use per diem for. The hypocrisy, particularly from a Republican, is troubling.”

Then again, plenty of Democrats have done the same thing.

•Former Sen. Sheila Kuehl, a Santa Monica Democrat, collected $238,623 in tax-free money from 2000 to 2008 and spent it on a $180,000 house in Sacramento. Just days after terming out, she sold the house for $299,000.

•Former Democratic Assemblywoman Jackie Goldberg of Los Angeles received $170,397 in tax-free per diem during her time in the Legislature. She spent it on a $121,000 house she later resold at $290,000.

•Tracy Democrat Barbara Matthews took $143,983 in tax-free per diem during the five years in the Assembly after she bought a house in Sacramento for $190,000. She sold it after she was termed out for $340,000.

Matthews said she bought her small house in a leafy East Sacramento neighborhood not because she wanted to invest, but simply because she wanted some privacy when she got home from a long day at the Capitol. A little more than five years later, when her term was up and it was time to leave, Matthews sold to another lawmaker, Assemblywoman Anna Caballero.

But Matthews said she never actually thought about leveraging her per diem to make money in real estate. It just worked out that way.

“I just got lucky,” she said. “Sometimes being lucky is better than being good.”

In recent times, however, not all lawmakers have fared so well. In 2008, former Assemblywoman and current U.S. Rep. Laura Richardson, D-Long Beach, made headlines for defaulting on her home in Sacramento. Richardson’s home was foreclosed on and sold, although subsequently the lender rescinded the sale and gave it back to her. A House ethics committee is now investigating how she got her house back. In November, a default notice was filed again at the Sacramento County Recorder. The congresswoman’s aides insisted in interviews that the default has been cured.

Meanwhile, at least two other former Assembly members have had similar problems. Both Mervyn Dymally, a Democrat from Compton, and Ed Chavez, a Democrat from La Puente, lost their Sacramento homes to foreclosure in 2009. Chavez didn’t return calls to the Register, but Dymally said he was a victim of the “whole Wall Street (real estate) scam.”

TAX RELIEF, TIMES TWO

Public records and legislative records indicate at least about 30 current lawmakers own homes in the Sacramento area and received a tax-free per diem in 2009. And while their property values might not be skyrocketing at the moment, there are other benefits to taxpayer-subsidized homeownership.

Homeowners gain the highest and most valuable tax deductions from their primary home. But tax laws also offer deductions for second homes as well. Under federal tax laws, you can deduct the property taxes of your second home as well the home mortgage interest, provided the combined mortgage of both your first and second home isn’t more than $1 million. Depending on your tax bracket, that can translate into some significant savings.

Whether all of the lawmakers who own homes in Sacramento seek a tax deduction is unknown because individual income tax records are confidential. But four current lawmakers, and one former one, freely admit to obtaining a deduction on their Sacramento homes. Assemblymen Jose Solorio, D-Santa Ana, and Cameron Smyth, R-Santa Clarita; Sens. Tom Harman, R-Huntington Beach, and Bob Huff, R-Diamond Bar; and former Senate Republican Leader Dick Ackerman of Irvine all said they write off part of their home expenses in Sacramento.

Five tax experts consulted by the Register said it’s legal to seek a tax deduction for home costs paid with tax-free money.

“I can’t seem to find anything illegal about what they’re doing,” said Tampa, Fla. tax attorney Darrin T. Mish in an email. “I think that given the economic condition of California and of the US that it cuts against the spirit of the law for lawmakers to be personally enriching themselves using the benefits of elected office. But again I can’t seem to find anything illegal about the situation.”

Home away from home

Tax experts also told the Register that it’s legal for lawmakers to receive tax-free per diem for their work in Sacramento even if they’ve declared their Sacramento home as their principal residence. In fact, they may claim per diem even if the only house they own is in Sacramento.

This loophole comes courtesy of overlapping federal and state tax laws, and state election laws, all of which have slightly different definitions of home.

State elections laws presume that the home of legislators is wherever that person is registered to vote. Federal tax laws, on the other hand, say that in order for legislators to receive a tax-free per diem they must declare their home in their district as their “tax home,” which the IRS defines as your primary place of business, regardless of where you maintain your family home.

Meanwhile, state tax laws allow California residents to receive a “homeowner’s tax exemption,” otherwise known as a “homestead exemption,” for one home they designate as their “principal place of residence.” Tax home and principal residence may sound like the same thing, but for legal purposes they’re different – and different from where you’re registered to vote.

That’s how former Assembly Speaker Fabian Nunez, a Democrat from Los Angeles, was able to declare his Sacramento home as his principal place of residence and still receive per diem for being away from his home in Los Angeles.

When he was working in Sacramento, Nunez lived in a $1.25 million home he still owns with his wife. When he was in Los Angeles, he shared a rented penthouse with his fundraiser, Dan Weitzman.

Nunez received the annual $7,000 homeowner’s tax exemption on his Sacramento house, because he declared that as his principal place of residence. At the same time, Nunez collected per diem for being away from home while working in Sacramento. He pocketed more than $68,800 in per diem tax free.

The Register also found that former Orange County lawmaker and current California Fair Political Practices Commission Chairman Ross Johnson collected tax-free per diem and took the tax exemption on his Sacramento home while serving in the State Assembly.

Johnson declared his home in the suburb of Gold River as his principal residence for six years, from fiscal year 1988-89 to 1993-94. During that time, Johnson said that was the only home he owned, although he said he continued to rent in Orange County, which he considered his home.

After that period, Johnson said, he bought a condo in Orange County, which he declared as his principal residence. In 2005-06, after Johnson had retired from the Legislature, he once again declared the Gold River as his principal residence.

For Nunez and Johnson, per diem acted less like an allowance and more like untaxed income. But like the other examples, it was legal.

Register staff writer Ronald Campbell contributed to his report.

Contact the writer: 916-449-6046 or bjoseph@ocregister.com