If you are a property owner in the City of Los Angeles, it’s vital that you understand the city’s transfer tax law. This law can have a significant impact on your wallet, so it’s crucial to know what is required to avoid paying any unnecessary taxes. In this blog post, we will discuss the details of the Los Angeles transfer tax law and provide tips on how to avoid paying any unnecessary fees.
Hundreds of millions of dollars will be generated by Los Angeles’s new transfer tax, which will be used to fund initiatives to increase the availability of low-cost housing and reduce the number of people experiencing homelessness. However, some homeowners are already looking into loopholes to avoid paying the tax, which is aimed at transactions worth more than $5 million.
Key Takeaways
- Los Angeles’ Measure ULA, otherwise known as the “mansion tax,” would introduce a fresh Homelessness and Housing Solutions Tax to all real estate in LA above $5 million.
- Los Angeles’ new transfer tax will raise hundreds of millions of dollars to fund housing initiatives and reduce homelessness. Some homeowners are seeking loopholes to dodge the $5 million levy.
- This new levy will apply to both residential and commercial properties alike.
Table of Contents
What Are Transfer Taxes?
The “mansion tax,” or Measure ULA, would add a new “Homelessness and Housing Solutions Tax” on all sales of residential and commercial real property valued value greater than $5 million.
The goal is to fund affordable housing and tenant assistance programs with the $600 million to $1.1 billion in annual revenue predicted from the new tax. This Client Alert is being sent out on the date that the measure has a current vote count advantage.
The proposed legislation would impose an additional 4% tax on the sale of residential and commercial real property with a value of above $5 million but less than $10 million, and a 5.5% tax on the sale of properties with a value of $10 million or more.
All real estate transactions, regardless of whether they are sold at a gain or loss, will be subject to the new tax on the entire transaction price – not just on any amount that surpasses $5 million and $10 million. With yearly inflation adjustments being made to these two thresholds, it is important for individuals engaging in such deals after April 1st, 2023 to consider this levy before concluding their contract.
Currently, property sales in Los Angeles are subject to a documentary transfer tax at a combined rate of 0.56% from the city and county.
For example:
A $5-million sale would include a $200,000 tax, and a $10-million sale would include a $550,000 tax, which is typically paid by the seller (Source: CPA Practice Advisor).
How Does Measure ULA Work?
Every deed, mortgage, or other instrument used to transfer ownership of real property within the city limits of Los Angeles is currently subject to a documented city transfer tax levied by the city and the county. At a valuation of over $100, property owners must pay a city tax of $4.50 per $1,000 in value and a county tax of $1.10 per $1,000 in value, for a total of $5.60 per $1,000 in value.
If Measure ULA is approved, the transfer tax amounts will dramatically increase on April 1, 2023, when a new tax on the sale or transfer of “high-value” real properties inside the city’s boundaries will go into effect. Properties sold for between $5 million and $10 million will be subject to a tax equal to 4% of the transaction price. Any sale of property with a value of $10 million or more will be subject to a tax of 5.5%.
Any outstanding liens or encumbrances will be factored into the property’s sale price for the measure. For instance, on April 1, 2023, the transfer tax owed by the seller of a property with a value of $100 million will increase by $5.5 million. Although Measure ULA would become law on January 1, 2023, its effects wouldn’t be felt until April 1, 2023.
In addition to the existing 0.56% documentary transfer tax currently imposed on all property sales in Los Angeles, a new city-wide tax is being introduced that could further impact buyers and sellers.
Companies that qualify as providers of affordable housing are exempt from the levy.
The Los Angeles Housing Department will decide whether or not a transferee is exempt from the requirement based on their track record of developing and/or managing affordable housing. There will also be exemptions for the housing sector, charities, and the public sector.
The annual revenue collected by the legislation is projected to range from $600 million to $1.1 billion. The Affordable Housing development and the Homeless Prevention Program will use at least 92% of the income for their respective affordable housing and tenant support programs.
Commercial real estate has always been a hot commodity, and with the current state of the economy, it is more important than ever for businesses to understand the role of government in this market. Read more about it here.
What areas in Los Angeles does this law impact?
The tax only applies to properties in the City of Los Angeles. It doesn’t cover the other 87 cities in Los Angeles that have their governments, like Burbank, Long Beach, Pasadena, and Santa Monica.
If you make any sales or transfers of real estate in Santa Monica County, both City and County Documentary Transfer Tax is applicable. To collect these taxes, the Los Angeles County Recorder’s Office is responsible for their collection.
When does the law take effect?
In addition to the current transfer tax, properties worth more than $5 million will be subject to a new transfer tax under Measure ULA. Despite the misleading name, this tax will apply to both commercial and residential real estate transactions.
Beginning on April 1, 2023, the new tax will be levied on all real estate transactions within the city limits of Los Angeles unless a vote of the people repeals it. Recently, several cities in California, including San Francisco, Culver City, and Santa Monica, have enacted similar laws imposing new transfer taxes on real estate transactions or the increasing existing transfer tax rate.
Who Pays Transfer Tax?
Typically, the transferee or grantee (seller) of the property is the one who must foot the bill for the tax. While certain countries may specify which party is responsible for making the tax payment, in most cases, the burden of determining who will cover this expense rests squarely on the shoulders of the buyer and seller. As is customary in California, the buyer often pays the Los Angeles County transfer tax, while the seller is responsible for the California transfer tax.
Transfer taxes are sometimes a topic of contention at the closing table, depending on the state of the local market. In a competitive seller’s market, for instance, the seller may receive many bids and eventually find a buyer willing to foot the bill for the transfer tax. There is a greater possibility that the seller will be responsible for the tax in a buyer’s market. Buyer and seller can agree to divide transaction expenses in a competitive market.
Potential Effects on landlords and tenants
The measure will most likely have far-reaching consequences. The business tenants and occupants of the entire city, not just those in high-value residential buildings, will be hit hard by the new tax. Without an adjustment in the sale price of assets to match the new transfer tax, rents may increase, firms may close, and other people may decide not to invest or acquire property in the city. More importantly, small and medium-sized businesses and residential sale transactions would feel the effects of the tax even if it is levied on properties worth $5 million or more.
How Can I Avoid The Los Angeles County Transfer Tax?
If you want to minimize the dreaded Los Angeles County Transfer Tax, then look into splitting large properties into smaller parcels. You can also separate your real estate sale transaction by selling personal property items such as furniture or equipment for $2M and the actual reality at an equal price of $2M.
If that doesn’t suffice and your property is worth over 5 million dollars, perhaps discuss a solution with potential buyers where everyone pays part of the transfer tax fee – albeit slowly making up the difference in other expenses like broker commission fees or escrow services isn’t ideal either! Lastly: don’t forget about beating LA county to their own game – if all else fails there’s always option #5- sell before the rule change takes effect!
Find a CRE Broker Experienced In The LA County Transfer Tax
In the City of Los Angeles, it’s now more important than ever to find a qualified CRE broker when transferring the title to a new homeowner. With the passage of Ballot Measure ULA, transfer taxes on properties worth more than $5 million are now 4.56% and even higher for properties over $10 million. That can add up quickly, so finding a reliable CRE broker who is experienced in LA County transfer tax laws is essential to avoiding expensive tax bills and costly delays. Have peace of mind knowing you’ve found an expert partner to help you navigate these complex regulations!
Los Angeles Transfer Tax Law FAQs
Who pays transfer tax in Los Angeles?
As is customary in California, the buyer often pays the Los Angeles County transfer tax, while the seller is responsible for the California transfer tax. Transfer taxes are sometimes a topic of contention at the closing table, depending on the state of the local market.
Does the city of Torrance have a transfer tax?
The tax levied by this Chapter shall be known as the City of Torrance Real Property Transfer Tax, as stated in codepublishing.com. The provisions of this Chapter are enacted by the provisions of Part 6.7 (beginning with Section 11091) of Division 2 of the California Revenue and Taxation Code.
How do I avoid paying taxes when I sell my house in California?
If you sell your house and meet the requirements set forth by the IRS and the FTB, you will be eligible for a capital gains tax exemption. Capital gains up to $250,000 for single taxpayers and $500,000 for joint filers are exempt from federal income tax.
The following conditions must be met to get the entire exclusion amount:
Your principal residence is the property on the market.
- At least two of the preceding five years have been spent with you as the property’s owner.
- Over the preceding five years, you have spent at least two years as a permanent resident in the house. You are not required to have continuously resided there for the years listed. Some people, such as those with disabilities or those serving in the military, Foreign Service, intelligence community, or Peace Corps, are exempt from this regulation.
- You did not purchase the property within the last five years through a like-kind exchange (commonly known as a section 1031 transaction). Essentially, this entails trading one piece of investment property for another.
Even if you don’t meet each and every one of these requirements, you may still be eligible for a partial exclusion of gain. In cases where the seller must relocate for a job, the buyer must relocate due to health reasons, or an unforeseen incident must be the primary motivating factor, this can occur. Learn more about these cases here.
Does transfer tax law apply to both commercial and residential properties?
Even though it’s popularly referred to as the “mansion tax,” it actually applies to all forms of real estate, including homes, businesses, and even undeveloped land.
Conclusion
No one likes getting surprised with extra fees, which is why it’s important to be aware of the potential transfer taxes in Los Angeles. While the tax may seem like a large expense, there are ways to avoid or minimize it. By working with an experienced professional, you can create a plan that takes advantage of available exemptions and minimizes your overall exposure.
If you’re concerned about the impact of transfer taxes on your future plans, we can help. Schedule a free consultation today to discuss your specific situation and retirement goals. Together, we can develop a strategy that helps you achieve your financial objectives while minimizing your tax burden.
