We all understand that living in a bustling U.S. metropolitan city comes with a premium price tag. Whether it’s New York City, Chicago, Miami, or Los Angeles, the cost of living is going to be exponentially higher than it is in more rural or suburban areas of the country. One common factor in this inflated cost of living in the cities is higher taxes. Whether it’s property tax, sales tax, or toll roads, heavily populated city and county governments know how to bolster their various budgets.
Enter the Los Angeles Mansion Tax
On November 8th, 2022, Measure ULA was passed by LA county voters. ULA, also known as a ‘mansion tax’ imposes a 4% tax on property sales above $5 million and a 5.5% on sales above $10 million. This means a $5-million sale would include a tax of $200,000, and a $10-million sale would include a $550,000 tax. This aggressive tax goes into effect on April 1st, 2023.
Measure ULA was marketed as “A new approach to reduce homelessness and protect low-income seniors”. The tax revenues will be used to fund affordable housing and tenant assistance programs. The House LA Fund has been established to collect tax revenue and allocate funds to projects designed to prevent homelessness and address housing availability at certain income thresholds. The ballot measure also created a citizen’s oversight committee tasked with developing funding guidelines, assessing project needs, and auditing expenditures.
What Now?
As one can imagine, the passing of Measure ULA has plenty of people up in arms. The mansion tax is quite a hefty one that will ultimately be the responsibility of homeowners to pay when their home is sold. As April 1st approaches, many homeowners of properties with a value over 5 million dollars are attempting to get their homes sold quickly in order to avoid paying the new tax.
There are already several high-profile property owners in LA that are doing everything they can to sell before April 1st. Los Angeles agents Josh Altman and Jade Mills recently pitched a lucrative deal sweetener for their $28 million listing at 1035 Stradella Road in Bel-Air. They’re offering a $1 million bonus to the agent who can bring a buyer to close a deal by the April 1 tax deadline, according to an Instagram video they uploaded on February 2.
How will Home Sellers try to Avoid the Mansion Tax?
Many local real estate, legal, and financial professionals are speculating that some wealthy home sellers will scheme up creative ways to avoid paying the Los Angeles mansion tax. Some of these methods may be perfectly legal while others may fall into a gray area. One legal way to avoid the tax is to sell your 5+ million dollar home before April 1st. That sounds easy enough…right?
It is very likely that sellers of homes valued at just over 5 million or 10 million will shrewdly price them at $4,999,999 and $9,999,999 respectively. Pricing just under those tax thresholds will allow them to avoid or minimize the tax. Some crafty sellers may even work out a hefty bill of sale with the buyer to purchase furniture or personal items for an amount that represents the rest of the full value of the home. This method is not legal, but there will inevitably be shady sellers who attempt it.
One extremely creative method of avoiding the tax that has been floated out there involves splitting a property into multiple parcels. In this case, a seller would split their property into 2 or more parcels and sell each of them for under $5,000,000 in order to collect the total value of their property while not having any of the transactions qualify for the Los Angeles Mansion Tax. The measure hasn’t gone into effect yet, so the legality of such a move remains unclear, and the city will probably take measures to stop such maneuvers.
Conclusion
At the end of the day, the Los Angeles Mansion Tax is something brand new. We really have no clue how rich homeowners will behave regarding Measure ULA. I would venture to say that sellers will go to great lengths to either avoid paying the tax altogether or minimize the amount they will owe. On the flip side, you better believe that the big bad tax man of LA County will go to equally great lengths to collect those tax revenues for the House LA Fund. It will be an interesting dance to watch.