How Will the New ‘Mansion Tax’ Affect You?

By MICHAEL EDLEN | Special to the Palisadian-Post

Measure ULA passed in the recent election, which resulted in a large added transfer tax in Los Angeles for any property sale of more than $5 million beginning April 1, 2023. This brief look is only to illustrate the impact on property owners, and not to review the numerous arguments that have been pointed out both for and against the initiative.

Anyone who wants to know the details can readily search for explanations online. In summary, most of the estimated $900 million per year expected will go toward affordable housing (70%) and 30% toward prevention of homelessness.

The calculation is straight-forward. For property sales below $5 million, the transfer fee rate will remain the same as it has been for many years: $4.50 per each $1,000. Starting April 1, 2023, any sales between $5 and 10 million will have a fee of $40 per each $1,000. And for sales $10 million or more, the fee is $55 per each $1,000.

A couple of examples illustrate the magnitude of these new rates and may incentivize people in Pacific Palisades who are thinking of selling property soon.

The average Palisades sale today is about $4.5 million, and the city transfer fee on a sale at that level would be $20,250. This will remain the same after April 1, 2023.

If a home were to sell today at $5 million, the fee would be $22,500. However, if that sale occurs after April 1, 2023, the fee will jump to $200,000.

If a home were to sell today at $10 million, the fee would be $45,000. As of April 1, it will be $550,000.

Obviously not many Palisades homes sell for more than $10 million. However, many do and will sell for $5 million or more, and the equity of a seller will be significantly impacted by the much higher fee.

Are there any other reasons why it might make sense to sell your home before April 1?

Your equity has grown to its highest level and you could benefit by selling in a market that is still favoring sellers, despite the huge increase in interest rates.

You still have the leverage of a “seller’s market,” at least below the $10 million level. We can often still negotiate favorable terms for a sale in addition to achieving a record-high value.

Many people expect the market will finally reach a balance between buyers and sellers before the end of 2023, and if interest rates go much higher it will impact affordability even more.

Investors who own multifamily and commercial properties in LA will probably end up paying most of the income revenue generated by paying the transfer tax, as many of these would sell over $10 million. While this likely would disincentivize many developers who could not justify paying the higher price for properties that would cover the new transfer fees of the sellers, sellers can still defer payment of capital gains taxes in most cases by using 1031 exchanges.

Some owners considering selling in a year or so think this new fee will not affect them because their home is currently valued at $3.5 to 4.5 million. However, if inflation results in a 5 to 7% appreciation rate, it may be only a few years before they too would have this increased fee taken out of their proceeds.

Michael Edlen has been the trusted real estate advisor to more than 2,000 local homeowners and is available for a complimentary consultation at 310-600-7422 or michael@edlenteam.com.