Just weeks after Los Angeles voters backed a new measure that puts a one-time transfer tax on property sales above $5 million (to generate money for affordable housing and homelessness prevention), the city’s affluent homeowners are already exploring potential ways of avoiding the tax.
Known as Measure ULA (for “United to House LA”) the ordinance derisively referred to as “mansion tax” will impose a 4% tax on property sales above $5 million, rising to 5.5% on sales above $10 million. So a $5-million sale would include a $200,000 tax, and a $10-million sale would include a $550,000 tax, which is typically paid by the seller.
It’s set to take effect on April 1, 2023, and it’s already causing shock waves in the L.A. housing market. While some analysts say high-end transactions will remain highly profitable, others fear the tax will not only drive high-end developers elsewhere, but also discourage the construction of multi-family housing that it was meant to foster.
Agents say homeowners and developers are already rushing to sell before the deadline. Others are getting a bit more creative. Since the tax only affects sales above $5 million, some homeowners are looking into splitting up their properties into smaller parcels with different ownership entities so they can avoid the tax altogether. For example, if a homeowner is selling a mansion for $15 million, they’d be slapped with a $825,000 tax bill. But if they split up the property into three parts owned by three different entities and sold all three pieces for $4.999 million each, they would hypothetically elude the tax since it only kicks in at $5 million.
The measure hasn’t gone into effect yet, so the legality of such a move remains unclear, and the city would likely take measures to stop such maneuvers. But homeowners are exploring every avenue.
An analysis published by UCLA’s Lewis Center for Regional Policy Studies claims the tax will affect only about 4% of overall real estate transactions in a given year, including commercial, and less than 3% of single-family home and condo sales.
After practicing law for 35 years (specializing in real estate litigation), Lloyd Segal assumed the leadership of the Los Angeles County Real Estate Investors Association in 2017 from the late Phyllis Rockower. Lloyd is an author, real estate investor, mentor, public speaker, and LANDLORD. He is the also the author of four real estate reference books, including “Stop Foreclosure in California” (Nolo Press), “Stop Foreclosure Now” (American Management Association), “Foreclosure Investing” (Regency Books), and “Flipping Houses” (Regency Books). The Los Angeles County Real Estate Investors Association is the oldest (1996) and largest investor group in California. In his role as President, Lloyd is busy expanding LAC-REIA’s events and programs for members and real estate investors. For more information, visit www.LARealEstateInvestors.com.