In November 2022, Los Angeles residents approved a significant new transfer tax on real estate sales of $5 million or more. The new tax, known as Measure ULA, became law on Jan. 1, 2023, and will go into effect on April 1. Although sometimes referred to as the “Mansion Tax,” the new tax applies to all real estate sales, including residential, commercial, and vacant land transactions.
Los Angeles joins a growing list of other California cities that have passed similar transfer tax increases in recent years, including Culver City, Santa Monica, San Francisco, and San Jose.
How will it work?
Starting April 1, 2023, sales of real property over $5 million in the City of Los Angeles will be subject to a “Homelessness and Housing Solutions” tax. This tax is in addition to the existing combined documentary transfer tax of 0.56% currently imposed by both the City and County of Los Angeles. The new tax will be applied based on the following thresholds:
- 4% for sales of property between $5 – $10 million
- 5.5% for sales of property $10 million or more
For example, under existing rules, the sale of a $20 million property prior to April 1 would be subject to a $112,000 documentary transfer tax. However, if the same transaction occurred after April 1, it would be subject to an additional transfer tax of $1,100,000. Total transfer taxes alone for this sale would exceed $1,200,000.
It is important to note that, unlike the existing Los Angeles City and County documentary transfer tax, which excludes the value of any liens or encumbrances remaining on the property at the time of sale, the new tax applies to the entirety of the sale value, regardless of whether the property was sold at a gain or loss.
Will There Be Any Exceptions?
Certain organizations will be exempt from the new tax, including qualified affordable housing organizations who have a history of developing or managing affordable housing, certain nonprofit organizations, and government agencies.
What Are the Potential Effects?
It is hard to know the full impact of the new transfer tax at this point. Once it goes into effect, Measure ULA is expected to generate hundreds of millions of dollars in annual revenue to pay for affordable housing and tenant assistance programs. However, some critics have expressed skepticism over how effective the new tax will be in actually addressing the homelessness crisis, since a prior measure to build new affordable housing has so far not resulted in a reduction in homelessness.
Another criticism of the new law is that it could have a chilling effect on sales of residential and commercial properties in the City of Los Angeles, driving potential developers or investors outside the city limits where the new tax will not apply.
There are also a number of unknowns regarding how certain provisions of the Measure will be interpreted by the City of Los Angeles. For example, it is not clear whether the new law will apply to current exceptions to documentary transfer tax such as foreclosures or deeds in lieu of foreclosures. Additionally, it remains to be seen whether the City would permit transfers of separate interests in real estate (land and building structure) or splitting multi-parcel properties into separate transactions to fall below the $5 million and $10 million thresholds.
What Actions Should I Take?
Our Financial Planning team is here to help. Please contact us if you have any questions about Measure ULA or wish to discuss how it might impact your personal situation. Give us a call at 310-556-2502, email firstname.lastname@example.org, or contact your Westmount advisor directly.
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