California is known for its high property values. And in some parts of the state, like Los Angeles, high-value property owners now face additional financial considerations with a mansion tax. Officially known as the Measure ULA, or the United to House L.A. proposition, it primarily impacts high-end property sales by adding a levy on transactions exceeding $5 million. If you're a homeowner, investor, or seller in the California real estate market then it's important to understand how this tax works.
A financial advisor can provide personalized guidance, helping you optimize your real estate strategy while staying compliant with state regulations.
What Is the California Mansion Tax?
While California does not have a statewide mansion tax, Los Angeles has one for the city. A mansion tax is a real estate transfer tax imposed on high-value property sales. Unlike standard property taxes, which are paid annually, this tax is levied at the time of sale.
Who Does It Apply To?
The tax primarily targets high-value residential and commercial property owners who sell properties above $5.15 million as of June 2024. It affects those selling single-family homes, condominiums, apartment complexes and some commercial properties.
Where Is It Enforced?
While California has several local transfer taxes, the Measure ULA tax specifically applies to properties sold in Los Angeles. However, several high-income neighborhoods outside Los Angeles, such as Beverly Hills, Malibu and Calabasas, are exempt from the tax.
In addition to Los Angeles, the other jurisdictions in California that have enacted "mansion taxes" include Berkeley, Culver City, Emeryville, Oakland, Richmond, San Francisco, San Jose, San Mateo and Santa Monica.
What Are the Tax Rates?
The tax rate depends on the sale price of the property. For Los Angeles:
- Properties sold for $5.15 million to $10.3 million are taxed at 4%.
- Properties sold for over $10.3 million are taxed at 5.5%.
These rates are significantly higher than traditional real estate transfer taxes, making it essential for sellers to plan accordingly.
When Did It Take Effect?
The mansion tax became effective in Los Angeles on April 1, 2023, after being approved by voters under Measure ULA. It raised $192 million in its first 10 months, and is the largest single source of revenue for affordable housing and homelessness prevention programs.
How Is It Paid?
The tax is typically paid at closing by the seller. This means if a property sells for $6 million, the seller is responsible for paying 4% of the sale price ($240,000) in mansion tax fees.
How Does the Mansion Tax Affect Real Estate?
The mansion tax can increase the cost of high-value property transactions, which could discourage some buyers and slow sales in higher price ranges. In markets like Los Angeles, where home prices can exceed the tax threshold, it could influence pricing strategies and buyer demand. Here are four general ways in which the mansion tax could affect the real estate market:
- Slowdown in luxury home sales: Many luxury homeowners have reconsidered selling their properties due to the additional tax burden. This has led to a slowdown in high-value property transactions, with some sellers delaying sales or withdrawing listings altogether.
- Increase in off-market deals. To avoid triggering the mansion tax, some property owners have turned to off-market transactions or private sales, structuring deals in ways that minimize tax implications.
- Impact on commercial real estate. The tax does not just affect luxury homeowners - commercial property sellers also face increased costs, which can lead to higher rents or shifts in investment strategies.
- Incentivizing smaller transactions. Some sellers have adjusted their pricing strategies to keep sales under the tax threshold, leading to a shift in market dynamics and price negotiations.
California Mansion Tax – Exemptions
Here are three exemptions to consider:
- Government-owned properties: Properties sold by government agencies, such as city, county or federal entities, are typically exempt from the mansion tax.
- Nonprofit organizations: Some sales involving nonprofit organizations may be exempt, particularly if the sale is used to advance charitable or public purposes. This includes certain low-income housing developments or properties transferred between nonprofit entities.
- Affordable housing developments: Properties being sold for the purpose of constructing affordable housing may be exempt, depending on the specifics of the transaction and buyer intent.
California Mansion Tax – How to Avoid
Here are three possible ways to avoid the mansion tax:
- Sell below the tax threshold: Since the tax applies only to properties sold for $5.15 million or more, some sellers negotiate deals that stay just below this threshold.
- Split the transaction: Some sellers explore creative structuring, such as separating land and building sales or dividing ownership shares. However, you must comply with legal requirements and should consult with a tax expert in California to verify whether you could do it.
- Gift or transfer ownership: Transferring a property to an heir or family member before selling can, in some cases, circumvent taxes, particularly if done through estate planning or trusts. You may want to consult with a tax expert in California to see if this applies to the mansion tax as well.
Bottom Line
While the mansion tax is not a statewide tax, it can significantly impact high-value real estate transactions in cities like Los Angeles. The tax aims to fund affordable housing initiatives, but it can also make the housing market more expensive for sellers and investors. For property owners facing this tax, a tax expert can recommend specific tax-efficient strategies.
Tax Planning Tips
- If you are looking for ways to lower your tax liability, a financial advisor who specializes in tax planning can help optimize your finances. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much your next tax refund or balance could be, SmartAsset's tax return calculator can help you get an estimate.
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