Last year Los Angeles voters approved Initiative Ordinance ULA, or the ULA Tax, with 57.7% in favor. The ULA Tax, commonly referred to as the “Mansion Tax”, imposes a 4% tax on all real property sales between $5 million and $10 million, and a 5.5% tax on all real property sales of over $10 million. The tax goes into effect on April 1, 2023.
The measure is expected to impact approximately 4% of real estate transactions and applies to both residential and commercial transactions. If the tax had been in place in 2022, it is expected it would have raised close to $1 billion in funding. The purpose of the tax is to fund city efforts to increase supply of affordable housing and reduce housing costs for the homeless and low-income individuals.
The Mansion Tax, however, is not without problems. Notably, the tax applies to the entire sale price, not just the amount in excess of $5 million or $10 million. So, for example, a property sold for $4.99 million will not be subject to the Mansion Tax, while a property that sells for $5.01 million will be subject to a tax of over $200,000. This means the proceeds from a $5.01 million sale will be significantly less than the proceeds of $4.99 million sale. Additionally, the tax applies regardless of whether there is a gain or loss on the sale, and also applies regardless of whether there is a loan or lien associated with the property. This means it will be more difficult to generate a profit on sales of properties over $5 million.
The impact of the tax of course remains to be seen, as it has not yet been implemented. However, one can expect a flurry of activity in the luxury market between now and April 1, as property owners considering selling will seek to avoid the tax by selling before April 1. Additionally, several groups are challenging the tax, including in a lawsuit filed by a landlord group.
If you would like to further discuss our 2023 real estate predictions or how Esquire Real Estate Brokerage can help you in the Southern California real estate market, feel free to give us a call at 213-973-9439 or send us an email at firstname.lastname@example.org. For advice on your specific transaction and how the Mansion Tax may impact the transaction, please consult your attorney and/or accountant.