By: Liz Strait, PhD
Introduction
On April 1st, 2023, Los Angeles enacted a new voter-backed measure that effectively increased transfer taxes on property sales in excess of $5 million. The measure, officially known as Measure ULA but more widely referred to as the “mansion tax,” imposes a 4% tax on property sales valued between $5 and $10 million; and a 5.5% tax on sales valued above $10 million. The proceeds generated from this tax are earmarked for affordable housing and the prevention of homelessness in the city (the population experiencing homelessness has increased by 45% since 2016). The proliferation of taxes based on the value of a home can increase the cost of living across the country, affecting all homeowners (current and future). Understanding how transfer taxes can affect your clients and how best to guide your clients through the blind spots that can occur in response to changes in tax laws can help set you apart as a Financial Professional (FP).
Background
Los Angeles is not the first major metropolitan area to amend transfer tax laws to put more of a tax burden on higher-valued property sales. Both San Francisco and New York City have enacted transfer taxes ranging from 2.25% to 6%. So, while many property owners are not affected by so-called mansion taxes currently, there is reason to believe such tax legislation could be adopted in other areas as the cost-of-living throughout the country increases.
Most of the news around LA’s mansion tax has focused on individuals scrambling to offload their homes before April 1st in order to avoid the new taxes. However, solely focusing on the tax costs ignores the fact that real estate holdings are part of a well-rounded portfolio, and the costs and benefits of ownership or liquidation must be carefully considered by an individual and their FP. While the news headlines focus on a rush to sell, that does not mean this is the best choice for every homeowner. In fact, there are very few people for whom selling because of the tax makes sense.
The costs and benefits of ownership or liquidation must be carefully considered by an individual and their Financial Professional.