The Impact of the Mansion Tax on Los Angeles’ Housing Market
The Impact of the Mansion Tax on Los Angeles’ Housing Market
The controversial mansion tax, formally known as “Measure ULA,” aims to provide much-needed funds to combat local homelessness and provide attainable housing by adding an extra 4-5.5% transfer tax to high-value properties.
From the beginning, the mansion tax sparked widespread debate among local property owners, buyers, investors, developers, and real estate experts. While most agree that funding is needed to ease housing costs for LA’s most vulnerable residents, many disagree with the use of the mansion tax as the tool for securing these funds.
Since implementation in 2023, the criticism has grown as the initiative has drastically underperformed financial projections.
Here is a closer look into the mansion tax and how it is impacting Los Angeles real estate.
What is the Mansion Tax?
Approved by Los Angeles voters in 2022, the mansion tax is a transfer tax on the sale of high-value real estate. The funds generated by this tax support housing initiatives for low-income individuals and households who struggle with housing security.
This tax applies to all non-exempt properties within the City of Los Angeles, including multi-family residential, commercial, and industrial, in addition to the single-family estates that immediately come to mind at the mention of a “mansion tax.”
The only exemption is if the buyer is a qualified affordable housing organization, a qualified 501(c)(3) entity, or a government entity or agency. Even if the seller is a qualified affordable housing organization, it is not exempt from the tax if the buyer is not exempt.
What are the Sales Price Thresholds for LA’s Mansion Tax?
When the voter-approved measure was rolled out on April 1, 2023, it applied to properties with a sales price of over $5 million. However, this threshold is automatically adjusted every year based on the Consumer Price Index.
Beginning June 30, 2024, the mansion tax is levied as follows:
- Properties with a sales price below $5,150,000 = no additional tax
- Properties with a sales price between $5,150,000 and $10,299,999 = 4% additional tax
- Properties with a sales price of $10,300,000 or more = 5.5% additional tax
Who Pays the Mansion Tax?
Technically, the property seller pays the mansion tax. However, many sellers are attempting to share the burden with the seller (or even pass the cost along entirely) by increasing the listing price to account for the resulting taxes.
How the Mansion Tax is Impacting the LA Housing Market
For owners of properties over the sales price threshold, the financial burden of the mansion tax is significant. A $5.15 million property, for example, would incur a $206,000 ULA tax (in addition to the standard transfer taxes and other closing costs. A $10 million property would incur a $556,500 ULA tax.
This directly impacts the local luxury housing market, but the effects also reach into the greater real estate market.
Consequences of the Mansion Tax in LA’s Luxury Housing Market
Here are a few ways in which the mansion tax is altering the luxury housing market in Los Angeles.
Reduced Inventory and Market Stagnation
With homeowners reluctant to absorb the cost of the tax, and buyers afraid of listing prices being artificially high to offset the cost, Los Angeles has seen a reduction in the number of high-value homes on the market.
To no one’s surprise, we saw:
- A flood of sales over $5 million just before the tax was implemented in Q1, 2023. From April 2022 to March 2023, the year before the tax took effect, LA had 366 single-family home sales of $5 million or more.
- A dramatic reduction in sales of over $5 million ever since. In the 12 months following the implementation, there were just 166 single-family home sales of $5 million or more, representing a drop of roughly 68%
To date, the luxury housing market has not recovered.
Inaccurate Fair Market Value Records
Sellers are trying to minimize the impact of the tax by either:
- Selling below the threshold, even if the property is worth more.
- Listing the property for more than it’s worth so they will have more proceeds with which to pay the tax bill.
Both options are harmful to the market.
These prices are recorded as open-market sales prices, which indicate fair market value. As a result, they are typically used as the basis for property taxes, setting the “base-year” assessment unfairly high or low. Too high, and the homeowner is shouldering a greater tax burden in perpetuity. Too low, and the county is missing out on funding needed for infrastructure, schools, fire departments, police departments, and other local services.
Furthermore, these artificially high or low prices are used as “comps” when pricing similar properties. The price for future properties will now be based on this skewed data.
Shift Away from Luxury Development in LA
The ULA tax creates an additional expense for real estate investors and developers, which could make Los Angeles a less appealing market for luxury property development. This could cause developers and investors to choose markets with lower tax burdens, slowing down the construction of new high-end properties in LA, and reducing work for construction companies, real estate agents, and related businesses.
Consequences of the Mansion Tax Beyond the Luxury Market
While the mansion tax intentionally targets luxury properties, its effects extend to other market segments in multiple ways.
Far Less Support for Affordable Housing Than Projected
When the mansion tax was placed on the ballot for voters, proponents claimed it would generate between $600 million and $1.1 billion per year to fund affordable housing initiatives. But from April 2023 to October 2024, the total ULA income was just $439 million, 27-60% below expectations.
Furthermore, remember that the buyer must be an exempt entity to avoid the tax. These same entities cannot avoid the tax when they resell it in the future if their buyer isn’t also exempt. This prevents many exempt entities from purchasing properties to create affordable housing because their exit strategy is marred by this tax.
Shift Away from Large Scale Multi-Family, Commercial, and Industrial Development
In the same way that the mansion tax discourages developers and investors from getting involved in luxury home development, it also discourages the development of other property types over the tax threshold, including large-scale multi-family, commercial, and industrial. Again, this slowdown in construction impacts the local job market, reducing work for builders, contractors, electricians, plumbers, etc.
This is especially concerning for multi-family development. Given the chronic housing crisis in Los Angeles, the city needs more multi-family development, not less.
Less Funding from Standard Taxes to Benefit Communities
We have already seen how owners of high-value properties are far less willing to sell because of these severe financial penalties. Fewer transactions mean less money generated in standard transfer taxes. This means less funding for the city’s administration and public services.
Los Angeles and its residents may also be missing out on additional property taxes. Property taxes are capped in CA so long as the property owner doesn’t sell or newly construct the property. So, a property owner who holds the asset for many years likely pays far less in property taxes than a new buyer would. By discouraging property owners from selling, the city is missing out on the revenue from the higher tax basis a new buyer would receive.
The Current Status of the Mansion Tax
As of December 2024, Measure ULA remains in effect, continuing to impose additional transfer taxes on qualifying property sales in Los Angeles. There are ongoing legal appeals to this measure, however, recent court decisions have upheld the tax, reducing the likelihood of a repeal.
For now, Los Angeles developers, builders, and investors are working within the financial limitations imposed by the tax, focusing on developments below the mansion tax threshold.
