Understanding the Mansion Tax and How It Affects Luxury Real Estate

As of April 1st, a new property transfer tax called the Mansion Tax came into force and has caused wealthy individuals to find creative ways of dodging it. It imposes a 4.0% sales/transfer tax rate on properties worth $5 million or more while properties worth more than $10 million incur an additional 5.5% rate.

However, unlike income taxes, mansion taxes don't take buyers' net worth into consideration and here are a few strategies to avoid paying fees:

1. Understand the Measure

Los Angeles voters approved Measure ULA in November to create a real estate transfer tax of any property valued over $5 million for sales that exceeds that value threshold, creating the so-called "mansion tax". It is projected to generate significant revenues that can go toward affordable housing projects and homelessness prevention efforts.

This tax will be levied upon the seller of real property and paid at close of escrow. It applies to residential, multifamily and commercial real property transactions within Los Angeles City that require document recording for which there are exemptions, such as transfers to nonprofit organizations or Community Land Trusts with limited-equity housing cooperatives as stated exemptions.

Many luxury homeowners in the area are selling their properties quickly to avoid paying the mansion tax, especially those located in Westside areas where this tax takes effect on April 1. Sellers are offering reduced prices or providing lavish freebies in order to prompt buyers into moving fast.

Loss aversion is one of the more irrational elements that can interfere with decisions to sell a home and can have serious financial repercussions, whether by hastening the process too quickly or holding onto their property too long - both can have dire repercussions for both parties involved.

Financial Professionals should understand how the tax may influence their clients' buying and selling decisions to prevent costly irrationality with real estate investments:

2. Be Prepared to Pay

Measure ULA, commonly referred to as the mansion tax, will go into effect on April 1. This new law will impose a transfer tax of 4 percent for property sales exceeding $5 million and 5.5 percent for sales exceeding $10 million; funds collected through these sales will go toward affordable housing projects and services to combat homelessness in Los Angeles. While many experts hail this measure as keeping high-end properties accessible to most Los Angeles residents while some worry it might stifle development.

Real estate agents throughout Los Angeles have witnessed a race among luxury home sellers to move luxury properties off of the market before the mansion tax goes into effect. Actor Brad Pitt put his sprawling LA mansion up for sale this year for approximately $16 million; its amenities include skating park, tennis courts and multiple pools. Other celebrity properties that have hit the market this year include Jennifer Lopez's Los Angeles mansion and James Corden's Beverly Hills residence.

However, the rush to sell luxury properties in New York City is straining its real estate market. Some sellers are panicking and cutting prices drastically while others offer incentives like luxury cars in order to close deals quickly and make sales.

Understanding how the mansion tax works and its implications is critical when engaging in any real estate transaction, whether buying or selling. And don't forget Prevu's Smart Buyer commission rebate which could offset closing costs significantly by giving two-thirds of what a seller normally pays to their broker in rebate, potentially saving thousands during your purchase!

3. Be Flexible

Mansion taxes are levied on high-value properties to address housing affordability and inequality issues, creating significant revenue that is distributed among buyers, or shouldered by sellers themselves.

Last year, city residents approved a "mansion tax," which will levy a 4% transfer tax on properties over $5 million and 5.5% transfer tax on those over $10 million sold to buyers. The tax, payable by sellers themselves and paid annually by buyers themselves will bring in nearly one billion in additional funds that can help address homelessness and affordable housing issues in New York.

Even with all of its hype and rhetoric, Los Angeles' new mansion tax won't bring down luxury markets in Los Angeles. Instead, some real estate professionals anticipate it will spur further luxury investment. "If you are considering purchasing luxury property this year," suggests Dana Fox from Douglas Elliman broker/Luxury Portfolio International agent Dana Elliman.

To avoid the mansion tax, purchasing properties listed for less than $1 million is the simplest solution. There are a few loopholes you can exploit in order to circumvent it; one technique used by some is splitting transactions involving land and structures separately in order to remain under $1 million threshold for both transactions.

Other strategies involve agreeing on a published closing price that falls below $1 million, then paying "under the table" to keep final costs below this mark. Some developers are even withdrawing projects out of fear that a new tax could hinder momentum in one of the world's most desirable markets.

4. Have a Plan B

Real estate brokers do not believe the city's mansion tax will have a major effect on luxury home sales, according to Lewis Horne of commercial real estate brokerage CBRE. According to Horne, the new levy applies equally to industrial, retail, and office properties and does not just target homelessness as was initially claimed; while Horne does support efforts that address homelessness he does not approve of using this method.

5. Be Creative

Luxury buyers today expect the same seamless experience when buying homes, and with more aspiring homebuyers moving to LA each day they are searching for innovative ways to speed up the purchasing process.

Agents have responded by being creative with how they market their listings, offering incentives like free McLaren or Bentley cars with the purchase of properties before April 1. This effort to draw buyers before the mansion tax takes effect can help agents stand out.

Tatiana Derovanessian of Tatiana Derovanessian Real Estate Services announced an incentive designed to help her clients avoid the new tax by closing on their dream homes before the deadline. According to Derovanessian, this move will save them money while simultaneously guaranteeing satisfaction with their purchase decisions.

On April 1st, voters who approved a 4% mansion tax are due to put it into effect, impacting properties worth over $5 million and projected to generate $700 million yearly - funds which will go toward affordable housing projects and homelessness prevention efforts.

Jason Oppenheim, co-founder of luxury firm The Oppenheim Group, feels that the proposed mansion tax will have a detrimental impact on the luxury market. According to him, this tax may discourage people from building new homes and hinder economic development overall; furthermore he does not believe the new tax will generate enough funds for cities to meet their goals.