Los Angeles Mansion Tax - An introduction
A new transfer tax, dubbed the "Mansion Tax," came into effect on April 1, 2023, in the City of Los Angeles.
This tax, approved by voters under Measure ULA, imposes a 5.5% tax on sales of high-value real estate.
With the effective date now passed, the real estate market had been bustling, with parties attempting to finalise deals before the new tax took hold.
The Mansion Tax in Context
Currently, the documentary transfer tax rate in Los Angeles stands at $5.60 per $1,000 of value (0.56%).
This tax is based on the net value, excluding any liens or encumbrances on the property at the time of transfer.
The Mansion Tax, however, will be calculated on the gross value, inclusive of any liens or encumbrances.
The tax imposes an additional 4% tax on properties valued between $5,000,000 and $9,999,999.99, and a 5.5% tax on properties worth $10,000,000 or more.
The Mansion Tax's Impact
This new tax not only affects buyers and sellers of real estate but also have implications for rental property markets, potentially leading to rent increases.
The tax applies to all types of real property sold in the City of Los Angeles, valued over $5,000,000, unless otherwise exempt. Exemptions include transfers to certain non-profit, affordable housing, and tax-exempt organizations.
Recent Developments and Uncertainties
On March 16, 2023, the City of Los Angeles released a list of FAQs to address general questions about the Mansion Tax.
The FAQs introduced a calculator to determine the city transfer tax due, but it does not include the county tax, which must be added separately.
Despite the FAQs, uncertainty remains in the marketplace. It is unclear whether the same city and state exemptions will apply to the Mansion Tax as they do for the current documentary transfer tax, and whether entity interest transfers resulting in a change of control will be subject to the Mansion Tax.
It is anticipated that more guidance will be released by the City of Los Angeles.
Legal Challenges and Potential Future Developments
The validity of the Mansion Tax has been questioned in recent lawsuits, with opponents claiming it is an unlawful special tax that violates property owners' equal protection rights.
The City of Los Angeles filed a memorandum supporting a motion to dismiss on March 15, 2023. The outcome of these lawsuits, both federal and state, is uncertain. However, the Mansion Tax still came into effect on April 1, 2023.
Furthermore, a ballot initiative called The Taxpayer Protection and Government Accountability Act could potentially end the Mansion Tax and similar measures.
This act, expected to appear on the California ballot in 2024, would require two-thirds of voter approval for new local special tax increases and invalidate any tax increases adopted after January 1, 2022, that did not receive two-thirds voter approval. This would include the Mansion Tax, which was passed by a margin of approximately 58% to 42%. The act, as currently drafted, does not provide for tax refunds or rebates for amounts paid under invalidated taxes.
Conclusion
The Mansion Tax has, and will continue to, significantly impact the real estate market in the City of Los Angeles, with effects on buyers, sellers, and rental property markets.
If you have any queries about the Los Angeles Mansion Tax or other US tax matters then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.