Real Estate at $5 million+ is more expensive to sell in the City of Los Angeles after passage of new tax in Measure ULA - Effective April 1, 2023

?????????In the election of November 2022, the City of Los Angeles voters approved Measure ULA [United to House L.A.] which imposes an additional tax on the sale of real property in the City of Los Angeles on or after April 1. 2023 where the consideration or value of the real property is more than $5 million.?The Measure ULA tax is called the “Homelessness and Housing Solutions Tax [HHS Tax] and sometimes referred to as the “Mansion Tax”.?However, Measure ULA actually proposes taxes on many types of real property including residential. Commercial, industrial and vacant land.?The HHS Tax may be adjusted for inflation.?Selling real property for $5 million or more is now much more expensive in the City of Los Angeles.

?????????The HHS Tax may raise about $600 million to $1.1 billion a year depending upon real estate market conditions.?The HHS Tax funds are to be used to grow affordable housing in the City of Los Angeles including funds to build new affordable housing, protect existing low-cost housing, fund tenant assistance programs, and other provisions to help the City of Los Angeles handle the homeless and housing issues.

?????????The Measure ULA enacted a 4% tax on the sale or transfer of real property at more than $5 million along with a 5.5% tax on the sale or transfer of real property valued at more than $10 million.?It also established a House LA Fund to collect the tax and allocate funds to projects designed to prevent homelessness and to managing the availability of housing depending upon income thresholds.?A new citizen’s oversight committee will develop funding guidelines, review various project needs and review and audit expenditures from the fund.

The HHS Tax rate jumps to 5.5% (for the entire consideration and not just the consideration beginning at $10 million) when the consideration or value of the transferred property is $10 million or more.?The new tax applies to whether the real property is sold at a gain or a loss.?The HHS Tax is in addition to the Los Angeles City and County documentary transfer taxes that are already imposed on transfers of real property at a combined rate of $5.60 per $1,000 of value (or fraction thereof).??

In calculating the tax, some find the body of Measure ULA a bit ambiguous as to the 5.5% threshold.?Some believe the 5.5% HHS Tax rate applies when the consideration or value is $10 million while others believe it applies only when the consideration or value exceeds $10 million.?For purposes of this article, we have assumed the 5.5% rate applies at $10 million or above.?Note that the HHS Tax rate is imposed in addition to any other Los Angeles City or County documentary transfer taxes already in place.?Also, the HHS Tax Rate is imposed on the entire consideration or value when the consideration or value of the transferred property is $10 million

Note that Measure ULA imposes the HHS Tax rate of 5.5% for the HHS Tax rate jumps to 5.5% for the entire consideration and not just the consideration beginning at $10 million.??The HHS Tax is in addition to the Los Angeles City and County documentary transfer taxes that are already in place on real property transfers.?

Of interest is that the HHS Tax is calculated based on the gross value of the subject real property. ?Thus, the HHS Tax is not reduced by the amount of any continuing debt assumed by a buyer notwithstanding there may be other taxes that calculate the tax otherwise.

The HHS Tax is substantial and sellers may decide to negotiate for the buyer to pay all or part of the new HHS Tax on sales on or after April 1, 2023.?For example, if real property in Los Angeles City with a value of $5.5 million and debt assumed of $2.5 million, the transfer taxes owed would be $236,800 ($3,300 L.A. County transfer tax; $13,500 L.A. City transfer tax; and $220,000 HHS Tax).?As a further example, should the real property sale be for a value of $10.5 million and debt assumed of $5.5 million, the tax would be $605,500 ($5,500 L.A. County transfer tax; $22,500 L.A. City transfer tax; and $577,500 HHS tax).

Thus. sellers faced with such rigorous taxes may decide to increase the sales price to cover the tax or will decide to negotiate with the buyer for the buyer to participate in payment of the HHS Tax.?As a result, buyers may pay all or part of the HHS Tax or decide to purchase another parcel of real property outside of the City of Los Angeles.

In real estate and escrow transactions, attention must be placed on the transactions of $5 million and more to determine the amount of the HHS Tax and who will pay it.?As time passes, the City of Los Angeles should provide more information on compliance and whether there will be forms and information to explain the HHS Tax and to whom it will be paid.?

?????????Whether Measure ULA will accomplish what it purports in resolving the housing and related issues in the City of Los Angeles, only time will tell.?Hopefully, there will be transparency in the fund collection, deposits and expenditures so the public members may understand how the City of Los Angeles manages the stewardship of the money and if it is used for the homelessness funding and related issues.?

?????????Some are considering whether taxes such as the HHS Tax will be imposed in other jurisdictions in California not only to deal with funding projects for the homeless……but, also to provide money for unpaid government liabilities such as unfunded pension liabilities.???

A full text of Measure ULA is available at https://ballotpedia.org/Los_Angeles,_California,_Proposition_ULA,_Tax_on_$5_Million_House_Sales_Initiative_(November_2022). For those who wish to know more about the real property taxes imposed on Cities and Counties in California, you may find interesting the information at deedclaim.com and californiacityfinance.com.

This article is provided for information only and does not constitute legal advice.?Readers are informed to contact their own attorney for any legal advice.