Los Angeles voters approved a tax on the sale of mansions and other multimillion-dollar real estate transactions to raise money for affordable housing in the second-largest US city.
The measure, known as Proposition ULA, boosts the one-time transfer tax to 4% for property deals between $5 million and $10 million, and 5.5% for transactions of $10 million and above. Beginning on April 1, 2023, this additional transfer tax is in addition to the current county and city transfer tax rates of 0.11% and 0.45%, respectively, increasing the total transfer tax rate to 4.56% on transactions between $5 million and $10 million and to 6.06% on transactions of $10 million or more.
Unlike the pre-existing transfer taxes, the new tax under Measure ULA will apply to the entire value of the property, including any lien or encumbrance remaining on the transferred property at the time of the sale assumed by the transferee. Transfers of real property to certain governmental entities and transfers to nonprofits, community land trusts and limited-equity housing cooperatives that demonstrate a history of affordable housing development may qualify for an exemption. Measure ULA imposes a special tax since the proceeds are earmarked to fund homelessness prevention and affordable housing initiatives. The tax increase would affect about 4% of real estate deals annually in Los Angeles, with 72% of its revenue coming from properties that sell for more than $10 million, according to an analysis by the UCLA Lewis Center for Regional Policy Studies.
Opponents, mostly in L.A.’s real estate industry, say the tax couldn’t come at a worse time as rising interest rates nix deals in the city of Los Angeles. They argue it may have a long-term dulling effect on investing in L.A., driving investors to seek lower-tax cities to buy property. Further, opponents are skeptical that the money will be used effectively to solve the intractable problem of homelessness and housing affordability.
“It’s abhorrent. It’s a disaster for the commercial real estate business,” Bob Weiss, attorney at Los Angeles law firm Valensi Rose PLC, told CoStar News. “The tax itself will create tremendous decline in value.”
Opposition is mounting to dismantle the tax that analysts say more cities may support in coming years, and a lawsuit was filed in the Los Angeles Superior Court in December to block the tax. The suit is supported by the Howard Jarvis Taxpayer Association and the Apartment Association of Greater Los Angeles. The suit is in its preliminary stages and a court date hasn’t been set yet.
Meanwhile, signatures are being gathered to put a proposal called the Taxpayer Protection and Government Accountability Act on the statewide ballot in 2024. Simply put, the act will make it more difficult to pass tax increases on a statewide and local level. Some real estate analysts say the efforts to upend the new levy are folly.
Property Tax History
California might be known for its high income taxes but less well known is the state’s relatively low taxes on commercial and residential properties, said Susan Shelley, vice president of communications for the Howard Jarvis Taxpayers Association.
Shelley’s group was founded in 1978 by Howard Jarvis, who lobbied for the successful passage of Proposition 13, which was enacted that same year. That law limits commercial and residential property taxes so that, in many cases, Golden State properties can only be taxed at 1% of their assessed value. That value is assessed at the time of sale, not annually, and typically can only reset when the property sells again. That means taxes on property increase little after it’s purchased even if the real estate’s value has soared.
Proposition 13 has long been popular among property owners, and politicians for decades have attempted to avoid dismantling the law out of fear of being voted out of office. But Proposition 13 also has been decried as creating wider wealth gaps, limiting power of local governments, hurting local school funding and resulting in an unbalanced state budget. California’s low property taxes on commercial properties are not the norm nationally. Many states require commercial properties to be taxed at newly assessed values annually.
Since Proposition 13’s passage, local governments have scrambled to find ways around the law to raise taxes on real estate. Property taxes can account for three-quarters of local tax collections and fund K-12 education, police, fire department, parks and more, according to Washington, D.C.-based nonprofit Urban Institute. Chicago attempted a similar property transfer tax in November that failed.
Shelley sees ULA as another workaround to Proposition 13 and believes her group’s lawsuit will prove the law is illegal. Furthermore, Shelley said she doesn’t support how the tax money will be used in Los Angeles. She said homeless people need medical treatment and temporary and emergency shelter instead of the permanent housing that the levy is designed to fund.
“I don’t think it’s fair to say that money can be taken from people trying to pay their own bills and housing costs to give free apartments to anyone who wants one,” Shelley said.
If the lawsuit against the Los Angeles tax fails, groups opposed to the tax hope that the Taxpayer Protection and Government Accountability Act will prevail in the years ahead. This initiative, if passed by voters, would ensure that voters would have the final say on all proposed state tax measures after these measures passed the state Legislature by a two-thirds vote and had the governor’s signature.
On the local level, the act would require citizen-sponsored new taxes to need a two-thirds vote. With 57% of the vote, the new tax wouldn’t have passed if the Taxpayer Protection and Government Accountability Act were enacted.
Proponents of the Taxpayer Protection and Government Accountability Act say that California’s taxes are enriching a state government that, according to Bloomberg, had a $98 billion state budget surplus in 2022, However, the state of California’s taxes mostly rely not on property but on income, which can vary widely because of economic conditions, and after a slowing economy in 2022, California faces a $22.5 billion budget deficit this year.
Source: https://ballotpedia.org/Los_Angeles,_California,_Proposition_ULA,_Tax_on_$5_Million_House_Sales_Initiative_(November_2022), https://news.bloombergtax.com/daily-tax-report-state/la-approves-tax-increase-on-real-estate-deals-over-5-million, https://www.costar.com/article/1431333867/los-angeles-mansion-tax-shakes-up-commercial-property-sales,