On the sale of high-priced properties sold in the City of Los Angeles, a “Homelessness and Housing Solutions” tax was voted into law in 2022 as Measure ULA.
Commonly known as the mansion tax, the tax is added to the base tax rate of 0.45% the city charges on the sale or other transfer of all types of property.
As of April 1, 2023, the property transfer tax rates in the City of LA are:
- unchanged at 0.45% for properties with a fair market value (FMV) less than $5 million at the time of transfer;
- 4.45% for properties valued at least $5 million but less than $10 million when transferred; and
- 5.95% for properties valued at $10 million or more when transferred. [Los Angeles Municipal Code Chapter II, Article 1.9 §21.9.2(a)]
These thresholds are adjusted annually by the City’s Director of Finance. [LA Mun C Chapter II, Article 1.9 §21.9.2(c)]
These tax rates on sales apply to all types of real estate in the City of LA, including sales of residential, commercial and vacant parcels.
However, some types of residential purchases are exempt, including property purchased by:
- tax-exempt institutions;
- non-profit entities or community land trusts with a history of low-income housing development and/or low-income housing property management experience; and
- non-profit entities or community land trusts without a history of low-income housing development or management — but which record an affordability covenant at the time of purchase. [LA Mun C Chapter II, Article 1.9 21.9.14]
Further exempt are 501(c)(3) entities initially designated as such by the Internal Revenue Service (IRS) at least ten years prior to the transaction with total assets valued less than $1 billion. [LA Mun C Chapter II, Article 1.9 §21.9.15]
For example, a commercial property which sold for $10 million in March 2023 was subject to a property transfer tax of $45,000. Now, a property which sells for the same price will be taxed a 13-fold figure of $595,000.
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Opponents of the new tax say it will limit development within the city’s bounds, punishing sellers of high-priced property. Owners of high-priced assets will choose to sell assets elsewhere or not sell at all — or simply charge a 5% greater price to sell, essentially passing the tax along to the buyer. Thus, profits will be reduced for all involved.
However, proceeds from the new tax will help LA meet its low-income housing and homelessness prevention goals, particularly focused on protecting seniors at risk of homelessness. The genesis of much of this homelessness is tracked back to the late 1960s when California first greatly reduced Patton, Napa, Atascadero, etc., facilities for those who could not take care of themselves and were homeless.
While opponents may claim the new tax is a bit like robbing Peter to pay Paul, they might be forgetting that Peter has resources to spare without altering their lifestyle — and Paul is barely making ends meet.
In Los Angeles, 59% of renters are cost burdened, or paying more than 30% of their household income on housing — higher than any other major U.S. city, according to the ULA Initiative text. Worse, 32% of renters pay more than half their income on rent!
Roughly 42,000 people were homeless in the City of LA as of 2020. 70% of these individuals are unsheltered.
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The economic impacts are clear. With significantly less money left to spend on goods or services — let alone save up for a down payment or rental deposit — renters are stuck in a worsening financial situation, sometimes forced out of their housing and onto the streets. Many choose to leave LA altogether when they have family elsewhere.
Despite the noble goals of these tax rates, stories abound of panicked property owners slashing prices and offering concessions in a rush to sell before the deadline. One LA brokerage offered agents a $1 million bonus to find a buyer to close before the deadline on a $28 million home, as reported in the New York Times.
The homeownership rate in LA is one of the lowest in the state, averaging just 48% in 2022, according to the U.S. Census. This leads real estate agents to rely on a small number of transactions each year to make a living (left to roll the dice on scoring a million-dollar “bonus” fee).
The city’s widening income gap has led to diminished outcomes for all but the wealthiest of its residents. Without a steady stream of financially healthy homebuyers, real estate agents will fall into the income gap, too.
Read more about how California is addressing the housing shortage and keep up with pending laws relevant to your practice as they make their way through the legislature.
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