In November, Los Angeles residents approved a new transfer tax on the sale of real property of $5 million or more ie. condos, office buildings, homes. The new tax, known as Measure ULA, passed on Jan. 1, 2023 and will go into effect on April 1st. Although sometimes referred to as the “Mansion Tax", the new tax applies to all real estate sales. Los Angeles joins a growing list of other California cities that have passed similar transfer tax increases in recent years, including Culver City, Santa Monica, San Francisco, and San Jose.
How Does It Work?
Starting April 1, 2023, sales of real property over $5 million in the City of Los Angeles will be subject to a “Homelessness and Housing Solutions” tax. This tax is in addition to the transfer taxes already imposed by both the City and County of Los Angeles. The new tax will be applied based on the following thresholds:
- 4% for sales of property between $5M and $10M
- 5.5% for sales of property $10 million and up
For example, right now the sale of a $20 million property prior to April 1st 2023 would be subject to a $112,000 documentary transfer tax. However, if the same transaction occurred after April 1, it would be subject to an additional transfer tax of $1,100,000. Total transfer taxes alone for this sale would exceed $1,200,000. (Talk about unfair!!!)
It is important to note that the new tax applies to the entirety of the sale value, regardless of whether the property was sold at a gain or a loss. Which means sellers will likely have to adjust their prices and pass these fees onto the buyers when selling a property. This also means investors will have to factor in these extra fees when deciding whether to invest in businesses in your neighborhood of Los Angeles which could easily pass the $5M dollar total value threshold. This new tax may discourage investors from investing in Los Angeles and to cause them to start targeting the surrounding cities where they can buy and sell homes/multifamily/commercial developments for under the $5M total.
Certain organizations will be exempt from the new tax, including; affordable housing organizations, certain nonprofits and government agencies.
What Are the Potential Pitfalls?
When it goes into effect, Measure ULA is expected to generate hundreds of millions in annual revenue to pay for affordable housing and tenant assistance programs. However, since prior measures to build new affordable housing have so far not resulted in a significant reduction in homelessness it really depends on how they use the money.
My Take: No matter how "affordable" a homes are, a homeless person will not be able to buy it without a decent credit score, full-time employment, down payment funds, among other things. These are things which they typically do not have which resulted in them becoming homeless. Hopefully the money is used in preventing more homeless and rehabilitating the existing homeless populations to actively reduce the number of people experiencing these difficulties in each city.
There are also a number of unknowns regarding loopholes, forms of ownership, transferring interest to family members, etc.... affecting how certain provisions of Measure ULA will be interpreted by the City of Los Angeles. Stay tuned for more info this and next year as it goes into effect.
What Actions Should I Take?
I am here to help. Please contact me if you have any questions about how it might impact your personal situation. Give me a call at (424)410-9292, email me at [email protected], or connect me with your real estate attorney as we discuss the best way to achieve your goals moving forward.