Your ultimate guide to understanding the LA mansion tax
On the first day of April this year, the City of Los Angeles finally implemented Measure ULA, which is also known as LA mansion tax. Continue reading below to learn more about the new law and how it can affect your home sale moving forward.
LA MANSION TAX: THE BASICS
The LA mansion tax is an added charge that mostly affects properties valued at least $5 million and more, hence the sobriquet.
Prior to the implementation of Measure ULA, sellers were required to pay a base rate of 0.45% on all real estate property transactions, regardless of the property’s value. But with LA mansion tax, additional charges are imposed:
- For properties valued between $5 million and under $10 million, a further 4% charge is added to the base rate, resulting in an applicable tax rate of 4.45%
- For properties valued at least $10 million and more, there is an add-on of 5.5%, resulting to an applicable tax rate of 5.95%
As for properties with a fair market value of below $5 million, only the base tax applies when transferred. That said, these value thresholds are expected to adjust every year depending on market conditions as well as the Bureau of Labor Statistics Chained Consumer Price Index.
But luxury property sellers don’t need to worry about adjustments being made any time soon— it’s expected that the current value thresholds will be retained in 2024.
What is the purpose of the LA mansion tax?
According to the City of Los Angeles, proceeds from the LA mansion tax will be used to fund a wide range of affordable housing projects across the city. The residents who will benefit from this the most are those who are on the brink of homelessness.
If enacted correctly, the LA mansion tax is expected to generate the city an estimated $900 million to $1.1 billion annually. Only 8% of the expected revenue will go to the overseeing staff, while most of the money will go directly toward LA’s housing initiatives. These are divided into two main categories: housing production, which will take up 70% of the housing budget, and homelessness prevention, which gets the remaining money (roughly 30%).
How did the LA mansion tax come to be?
The LA mansion tax’s implementation on April 1st came as no surprise. The city has been grappling with rising housing costs and homelessness for years. Some people have been forced to move out of LA while maintaining jobs in the city in order to reduce their financial stresses.
According to this white paper prepared by researchers from UCLA, only 20% of households in the City of Los Angeles can afford a home with the median price of $792,470. If housing prices and cost of living continue to increase, LA might suffer from significantly reduced homeownership rates.
As a measure to help curb LA’s affordable housing and homelessness issues, the LA mansion tax was lobbied by homelessness groups, labor unions, and its supporters. When the time came on November 8, 2022 to decide its future, LA residents came together to vote. About 58% of the voters were in support of Measure ULA.
What’s the difference between Measure ULA and Measure HHH?
Measure ULA isn’t the City of Los Angeles’ first attempt to solve the local housing and homelessness crisis. Just in 2016, the city also passed Measure HHH. This brought a 10-year $1.2 billion bond that will fund 10,000 new affordable housing units in LA. Seven years after its implementation, Measure HHH is on track to achieve its goal. And as it helped increase the annual production of supportive housing from 300 units to over 1,000 units, Measure HHH may even exceed its original target.
From this alone, we can glean that Measure HHH is focused on the production of affordable housing. Meanwhile, Measure ULA aims to generate more housing funds that will be invested in different projects and initiatives.
THE MECHANICS OF THE LA MANSION TAX
The City of Los Angeles has made clear outlines about what properties qualify for the additional charge, exemptions, as well as instructions about certain types of real estate.
Whether you’re selling a home, commercial property, or vacant land, the LA mansion tax is applicable to all real estate property transactions in the city. That said, Measure ULA also has provisions for certain types of properties or entities.
The following are exempt from the ULA tax:
- Qualified affordable housing organizations, which include the following:
- 501(c)(3) non-profit entities with a history of affordable housing development and/or housing property management
- Community land trusts and limited equity-housing cooperatives with a history of affordable housing development and/or housing property management
- Community land trusts and limited equity-housing cooperatives that are partnered or partnering with experienced non-profit organizations
- Limited partnerships and limited liability companies with where a 501(c)(3) non-profit entity, community land trust, or limited equity-housing cooperative with experience in affordable housing development and/or housing property management serves as either a managing member or general partner
- The United States and any federal, state, local agency or entity under it
- Recognized 501(c)(3) entities that received their letters of designation at least 10 years prior to the transaction and with assets of less than $1 billion
- Any other agency or entity exempt from taxation either by the City of Los Angeles or the California or U.S. Constitutions
In short, only affordable housing organizations and government entities are exempt from the LA mansion tax.
For properties partially located in Los Angeles
It’s not uncommon for people to refer to Los Angeles County as simply LA when, in reality, the county is made up of different cities including the City of Los Angeles. The LA mansion tax only applies to real estate transactions located within the city’s bounds. Whether or not the other cities located within the county will follow LA’s steps remains to be seen.
But in the event that a transaction involves a property that is partially located in the City of Los Angeles, there are two ways to establish the real estate property tax that needs to be paid:
- Option 1: The real estate property tax will only be based on the value of the property that is located within city limits, or;
- Option 2: The real estate property tax will be based on the square footage of the property that is located within city limits in case the property’s value hasn’t been established or is unavailable.
HOW WILL THE LA MANSION TAX IMPACT THE REAL ESTATE MARKET?
As of the time of writing, Measure ULA has only been in effect for at least a month. But in its short life so far, the new law already has made an impact in the City of Los Angeles’ real estate landscape.
Below are some of the expected effects of the LA mansion tax in the near future, as well as what’s currently happening in the market after its enactment.
Expected impact of the LA mansion tax
- More money earmarked for housing projects. Before Measure ULA, the City of Los Angeles only raised a little over $200 million from the base transfer taxes. These funds went straight to the General Fund. With the LA mansion tax, proceeds from the additional charges will go directly to housing with only a small portion allocated to the overseeing staff.
- It won’t affect the entire market. Given the current value thresholds, Measure ULA is expected to impact about 4% of total annual real estate transactions in the City of Los Angeles. Furthermore, roughly 72% of the projected revenue from the LA mansion tax will likely come from the sales of properties with fair market values of $10 million or more.
- Rent for both residential and commercial properties won’t be affected. According to UCLA’s analysis of Measure ULA, the LA mansion tax is unlikely to influence rent prices in the City of Los Angeles for two main reasons. First, sellers shoulder transfer fees and can’t pass the costs to their tenants. Second, rent prices are often influenced by market trends, not taxes.
- Large real estate companies and people who sell expensive properties may bear the brunt of the new tax. This prediction comes from sales data collected from the 2021-2022 fiscal year. Large real estate companies are one sector that will be significantly impacted by Measure ULA as 75% of the revenue earned from multi-family property sales came from properties valued at $10 million or more.
Most of the sellers behind these transactions were real estate corporations. It’s more or less the same pattern for sellers of high-value properties. Compared to the total number of property owners in the City of Los Angeles, however, these sectors are relatively small.
- Project labor agreements are now required. Real estate developers that would like to benefit from Measure ULA earnings must first have project labor agreements (PLAs). This document ensures that contracts involved in the project will receive benefits.
What has happened so far
Since Measure ULA was put to a vote in November 2022, so much has happened in the Los Angeles real estate market. Here are some of the most significant things that took place before and after the LA mansion tax was finally enacted.
- High-end sellers went on a mad dash to sell their properties before April 1, 2023. To avoid paying the additional (and hefty) levy that comes with Measure ULA, sellers tried their best to offload their high-value properties before the law’s enactment. And as a result, luxury Realtors were busy.
- Reduced prices and even bonus commissions were offered. In order to sell their high-value properties before April 1st, sellers employed numerous strategies.
Up until March, many luxury homes in the City of Los Angeles had their listing prices slashed in order to entice buyers and close deals as soon as possible. The seller of this Bel Air home (then priced at over $27 million) offered a $1 million dollar bonus to the agent who helped them sell the property. Other sellers included other freebies to sweeten the deal, including a brand-new sports car for one property and a $2 million credit to the buyer for another luxury home.
Were the sellers successful in closing their deals before Measure ULA? The results are a mixed bag. This $16.5 million new construction with a luxury car is still on the market. When it finally sells, the seller will have to pay an additional $981,453 due to the LA mansion tax. It is unclear if a luxury car is still offered with the home. 1035 Stradella Road in Bel Air, which came with a million-dollar bonus for the agent, also remains an active listing. With the LA mansion tax, the seller might pay as much as $1.6 million upon the property’s transfer.
Certain celebrities that reside or owned properties in Los Angeles joined the rush to sell before the April 1 implementation. Brad Pitt and Mark Wahlberg are some of the successful ones, while Jim Carrey, Jennifer Lopez, and James Corden were unable to find buyers.
- Los Angeles’ luxury real estate market has cooled down. After April 1st, the real estate market activity in LA ground to a halt. Not wanting to pay the LA mansion tax, many luxury home sellers took their properties off the market. While 126 homes with prices over $5 million were sold in March, only 2 deals of the same value closed in April. Both properties were within the $5 million to under $10 million value threshold. Together, their sales raised the City of Los Angeles $528,000.
While that is already approximately half of the estimated $900 million annual revenue, the luxury market slowdown also puts the Measure ULA funds at risk.
CHALLENGES AND CONTROVERSIES SURROUNDING THE LA MANSION TAX
While homelessness and affordable housing organizations rally around Measure ULA, like every other law, it also has detractors. Below are some of the points raised against the LA mansion tax as well as the challenges it faces.
Not all $5 million homes in LA qualify as luxury homes
Opponents of the LA mansion tax have pointed out that the Los Angeles housing market is unlike most markets in the country.
A home worth $5 million in the city may seem comparatively expensive than similar properties in other cities, but in Los Angeles, chances are it’s a single-family home with four bedrooms and 4,000 sq. ft. of total livable space. Some people have pointed out that in LA standards, such a property is hardly a luxury home. It’s likely that a seller of a home priced at $5 million is in the middle- to upper-middle class, not the high-net-worth individual other people picture them to be.
Real estate developers might leave the city
Detractors also fear that Measure ULA will completely freeze the luxury real estate market, or worse, force high-end investors and sellers elsewhere. Instead of Los Angeles, they might consider neighboring Beverly Hills or Calabasas instead.
Without real estate development and investment, LA’s economy might be dragged along. Home- and property owners may be encouraged to keep their portfolio instead and turn them into expensive rentals. This is worrying for the residential rental market: it could price more people out of LA and drive the market rate up.
Push to repeal Measure ULA
In February, a statewide ballot initiative called The Taxpayer Protection and Government Accountability Act gathered 1.4 million signatures. It will be put up to vote for Californians in November 2024. If successful, it will require the California State Legislature to open all new taxes in the state to be approved by its constituents. But how can it help repeal the LA mansion tax?
Another feature of The Taxpayer Protection and Government Accountability Act is the two-thirds voter approval requirement for all special tax increases in the state. Los Angelenos who don’t approve of Measure ULA can use this provision to dismantle the additional levy.
IS IT A GOOD TIME TO SELL YOUR LUXURY PROPERTY?
With the LA mansion tax currently in effect, your financial capacity and personal interests are some of the factors you need to consider before you sell your home.
Sell your home if you don’t mind paying the total real estate property transfer tax. Remember that only homes valued at $5 million and above are affected. Furthermore, if personal circumstances call for you to sell, better not delay. While home sellers are discouraged from listing their homes, there are still plenty of buyers interested in Los Angeles real estate.
But if you are uncomfortable with paying the LA mansion tax and have the luxury of time, it may be more beneficial for you to mull your options first before making a move. When you’re ready, connect with award-winning Realtor Joyce Rey. Get in touch with her here.