The City of Los Angeles’s new property transfer tax took effect April 1, with all real estate transactions in excess of $5 million affected.
Approved by voters last November, Measure ULA—known as the Homeless and Housing Solutions Tax—will add 4 percent to properties sold for between $5 million and $10 million, and 5.5 percent for those over $10 million.
“That is a big financial burden to the seller,” Gregory Bega, a broker with Sotheby’s International Realty’s Brentwood office, told The Epoch Times.
He suggested some of these costs will be passed onto buyers.
“No wonder there is an exodus out of California,” he said.
The new measure comes at a time when the state’s population is declining, with net domestic migration flowing out of city centers and into other parts of the country, according to Census Bureau data.
Critics argue the tax will inhibit investment, and investors are scrambling to adjust to the new rate structure.
For many years, stability in property taxes bolstered the state’s appeal to investors, according to experts. California law limits municipalities’ ability to raise property taxes under Proposition 13, which bases rates on the price paid for a home rather than the yearly appraised value.
Property tax revenues plummeted by 60 percent with the passage of Prop. 13 according to California legislative analysts, as statewide tax rates averaged 2.67 percent before the legislation limited it to 1 percent.
In response, transfer taxes like today’s ULA became a source of revenue generation, which some say places a disproportionate burden on property owners.
Los Angeles is not the only city with transfer taxes for high-end properties.
Culver City has a similar 3 percent tax for sales between $3 million and $10 million and 4 percent for those in excess of $10 million. Santa Monica also adds 5.6 percent for sales of more than $8 million.
Legal Challenges
The new measure is facing opposition and lawsuits aimed at delaying and preventing it.The Howard Jarvis Taxpayers Association and the Apartment Association of Greater Los Angeles are together challenging the constitutionality of the measure in Superior Court, and a separate lawsuit filed by Newcastle Courtyards, a Los Angeles real estate LLC, could join their efforts, awaiting a consolidation hearing in May.
The pending legal objections are an area of concern for the city, as detailed in a report from City Administrative Officer Matthew Szabo and Housing Department General Manager Ann Sewill, to the mayor and Los Angeles City Council on March 17.
“Collected taxes would need to be refunded regardless of the measure passing if the city loses in the pending litigation and measure ULA is invalidated,” the document reads.
Sellers subject to the tax can file a claim now for a refund if the measure is overturned, with the form on the taxpayers association website.
Other areas in Southern California, including Beverly Hills, Calabasas, Hidden Hills, and Malibu offer opportunities for those looking to avoid transfer taxes on high-end properties, according to local real estate experts, because they are not part of the city of Los Angeles.
As of April 1, transactions on such properties have slowed after three months of frenzied selling to avoid the new tax, according to sales records from the California Regional Multliple Listing Service, better known as the MLS.
Sellers are now incentivized to lower prices to offset the new tax, which will place a burden on the market and put downward pressure on pricing, according to local realtors.
Analysts forecast the measure to provide approximately $900 million in funding each year, with the proceeds slated for providing housing for the homeless.
While termed a “mansion tax,” the new measure also includes commercial real estate sales.
“This is the last thing anyone needs in commercial. Unfortunately, it’s not going to impact many mansions,” Susan Shelley, Vice President of Communications with the Howard Jarvis Taxpayers Association, told The Epoch Times April 3. “It’s going to impact apartment buildings and other commercial properties.”
The threshold for taxation under the new measure will include many residential and commercial properties.
“It doesn’t take much to get to $5 million in the city of Los Angeles, so this is going to have a big impact,” she said.
