City of Los Angeles Trumpets a “Mansion Tax” for Real Estate to Ring in 2023

Measure ULA (United to House LA) was passed by 58% of the City of Los Angeles’ voters in the November 2022 referendum and will become law on January 1, 2023, but it will only impact transactions starting on April 1, 2023. The new tax will be payable to the city in addition to the existing documentary transfer tax already imposed on property sales within the city, which has a combined city and county rate of 0.56%.  

Real estate owners of residential or commercial property valued at $5 million or more within the City of Los Angeles, in particular those considering or in the process of a transaction in 2023, will want to take note of this new measure and consult their tax and real estate professionals and counsel now to assess the impact on any existing or proposed transactions that may close on or after April 1, 2023. This new tax and its impact are discussed in more detail below.

What is it?

Measure ULA, commonly referred to as the “Mansion tax,” is also more accurately referred to as the “Homelessness and Housing Solutions Tax.”  Regardless the moniker, it will impose a new tax on the transfer of certain residential and commercial real property located in communities within the City of Los Angeles valued at over $5 million. The city estimates these transfer taxes will generate $900 million a year to pay for housing subsidies and provide financial assistance for tenant protections and housing security.  

What will the economic impact be?

Currently, the City of Los Angeles and Los Angeles County levy documentary transfer taxes on every transfer instrument that conveys land sold within the city and county. When the property’s value exceeds $100, the city collects tax at a $4.50 per $1,000 of consideration. The county levies a tax of $1.10 per $1,000 of consideration. The city and county transfer taxes currently amount to $5.60 per $1,000 of consideration.

On April 1, 2023, there will be a drastic increase in the transfer tax amounts payable when recording transfer deeds. The City of Los Angeles will impose an additional transfer tax on the sale or transfer of “high-value” commercial and residential real properties within the city boundaries. That tax will be calculated in the following manner: 4% for properties sold between $5 million and under $10 million and 5.5% for properties sold for over $10 million. The additional tax would apply to the entire sale value, not just the amount over the $5 million and $10 million thresholds, regardless of whether there has been a gain or loss on the sale. A property’s value will include any lien or encumbrance remaining on the property after the sale. 

This taxing scheme is similar to the model already in place in other cities in California, such as San Francisco, and more recently in Culver City and Santa Monica, which border several of the City of Los Angeles’s communities. The sale or property value thresholds are scheduled to be adjusted each year based on inflation. The tax is anticipated to affect approximately 4% of real estate transactions per year. 

Are there exemptions?

The Measure specifies that certain exemptions from the new tax do not apply to the existing documentary transfer taxes currently imposed. These exemptions include transfers to certain non-profit entities, community land trusts, and limited-equity housing cooperatives that, subject to certain exceptions, demonstrate a history of affordable housing development and affordable housing property management experience. Also, any other transferee exempt from the City’s taxation power under the state or federal constitutions will apply, such as mere changes in identity, form, or gifts of a property free from debt.

It is still being determined whether the exceptions outlined in the State of California transfer tax statute under sections 11911-11930 of the Revenue and Taxation (R&T) Code, will apply to the new tax (e.g., foreclosures and deeds-in-lieu of foreclosures). It is also unclear from the drafting whether or not the City will interpret certain parts of the Measure, including the application of the $5 million and $10 million thresholds, to transfers that include separate interests in real property (e.g., land and improvements, commercial condos) or partial ownership interests.  We will have to see how the final drafting of the law addresses these issues.

Will it apply to other non-instrument transfers?  

Based on the provisions drafted in Measure ULA, it appears likely that for property tax reassessment purposes, the city will also interpret the tax as applying to a transfer of interests in a legal entity which result in a change in ownership of real property held by the legal entity. 

For more analysis on the measure, you can refer to this Los Angeles City link here.  If our real estate team or tax team may be of assistance with upcoming residential or real estate transactions impacted by this measure, please contact Loretta Thompson or your usual Withers attorney.