Million Dollar “Tax” Baby: The Basics on Los Angeles’ New Mansion Tax

Effective as of April 1, 2023, the United to House LA measure (“Measure ULA”) imposes a new “Homelessness and Housing Solutions Tax” on transfers of BOTH residential and commercial property in the City of Los Angeles over $5 million. The “Homelessness and Housing Solutions Tax” (which is also colloquially known as the “Mansion Tax”) seeks to fund affordable housing and tenant assistance programs in an attempt to battle the difficult homelessness problem facing the City.

The Mansion Tax is an expensive tax imposed on each “deed, instrument or writing” by which any lands or other realty sold within the City of Los Angeles when the consideration or value of the interest or property conveyed (including the value of any lien or encumbrance remaining thereon at the time of conveyance) exceeds:

(1) $5,000,000 but is less than $10,000,000, a tax at the rate of 4% of the consideration or value; or

(2) $10,000,000 or greater, a tax at the rate of 5.5% of the consideration or value.

It should be noted that the property value threshold for purposes of the tax will be adjusted annually based on the Chained Consumer Price Index¹.

By way of market comparison, New York City has a “mansion tax” as well but it does not apply to commercial properties, so it is interesting that the Measure ULA text whether intentionally or inadvertently went further in its implementation of this equivalent tax in the City of Los Angeles.

Please note that the Mansion Tax is in addition to (and does not replace) the existing documentary transfer tax (see Los Angeles County Code of Ordinances, Title 4, Chapter 4.60) imposed on property dispositions in the City of Los Angeles, which is a combined city and county rate of 0.56%,² which excludes the value of any liens or encumbrances remaining at the time—which is in contrast to the Measure ULA requirements.

The Mansion Tax appears to apply only in circumstances when the documentary transfer tax itself would be applied, which includes numerous exceptions such as mere changes in identity, form or place of organization (see Los Angeles County Code of Ordinances, Title 4, Chapter 4.60). Relatedly, documentary transfer tax is not imposed on transfers of interests in legal entities that own property (unless there is a “change of control” in which more than 50% of the interests in the entity are transferred) or where there is no change in beneficial ownership, so, for example, transfers into trusts or between legal entities for tax planning purposes without change of control.

It is important to note that foreclosures and deeds in lieu of foreclosures are importantly exempt from the documentary transfer tax, although it is still currently unclear whether this exception also applies to the Mansion Tax. If the exemption does not apply, this would be a large expense for lenders to realize on their mortgage collateral within Los Angeles County.

Measure ULA authorizes the Director of Finance to issue any rules and regulations reasonably necessary to enforce or administer Measure ULA, including establishing procedures for administering exemptions to the new tax. The Director of Finance is to provide reasonable notice prior to the effective date of these rules or regulations and, as of the date of this article, no notice of any rules or regulations has been given.

There are specified exceptions (which are not applicable under Los Angeles County Code of Ordinances, Title 4, Chapter 4.60) related to transferees that are (i) a qualified affordable housing organization, (ii) a 501(c)(3) non-profit entity, which received its initial IRS Determination Letter at least 10 years prior to the purchase and has assets less than $1 billion, (iii) the United States (or any federal agency or instrumentality), any state, territory (or political subdivision thereof) or other federal, state or local public agency or public entity, or (iv) any other transferee exempt from the City’s taxation power under state or federal Constitutions.

Since Measure ULA passed, there has been a growing sentiment among property stakeholders in the City that the new tax would have a chilling effect on transactions. Similar taxes have also been adopted across California including Santa Monica and San Francisco. In addition, wealthy property owners are considering strategies to avoid paying the new tax or minimizing their tax liabilities as buyers and sellers adapt to this new economic reality. Moreover, Measure ULA is facing legal challenges from a coalition of real estate and anti-tax groups who filed suit in December 2022 in Los Angeles County Superior Court, attempting to block the City from implementing Measure ULA (see Howard Jarvis Taxpayers Association, et al. v. City of Los Angeles, et al., No. 22STCV39662).

Despite no rules or regulations being issued prior to the date of this alert, in discussions with title companies (who will be collecting the tax on real estate closings), the general consensus is that it is likely that the same exemptions to the documentary transfer tax (see Los Angeles County Code of Ordinances, Title 4, Chapter 4.60) will apply to the tax payable under Measure ULA, though we are “charting unknown waters with how the County will respond to the exemptions and [we] have no concrete information yet” as to whether those generally accepted exemptions will apply.

Please contact a member of the Los Angeles Real Estate Group should you have additional questions or want to discuss the Measure ULA tax or other Cities’ comparable transfer taxes) and their impact further.

¹ Chain-weighted CPI, or chained CPI, is an alternative measurement for the Consumer Price Index (CPI) that considers changes to consumer spending patterns to provide a more accurate picture of the cost of living based on the goods that consumers actually buy.

² Note, Los Angeles County currently imposed a documentary transfer tax of $1.10 per $1,000 (or 0.11%) and the City of Los Angeles currently imposes a documentary transfer tax of $4.50 per $1,000 (or 0.45%), which, together, is the combined rate of 0.56%.