Measure ULA: The Tax Man Cometh – and Taketh

In the November 8 election, voters in the City of Los Angeles savaged the value of so-called “expensive” residential and commercial real estate by adopting Measure ULA (“ULA”). Dubbed the “Mansion Tax,” ULA imposes additional transfer taxes on the sale of residential and commercial properties in Los Angeles, effective April 1, 2023.

A taxpayers' group is now challenging its legality in court.

Advocates of the tax say the proceeds will be up to $900 million annually, to be used to fund affordable housing and tenant assistance programs.

Currently, the combined city and county transfer tax is $5.60 per $1,000 of valuation. As of next April Fool’s day, the ULA boosts that by:

• 4% of the total consideration (there is no credit for existing debt) for sales of $5,000,000 or more, up to $10,000,000.
• 5.5% of the total consideration for sales of $10,000,000 or more.

Here’s a hypothetical example. Let’s say a property sells for $5,400,000 before April 1, 2023. The total city and county transfer tax would be $30,240.  If the sale occurs after that date, the additional tax would be $216,000, for a total of $246,240.

The situation gets even uglier for sales of $10,000,000 or more. In the case of a $10 million sale, ULA would impose a whopping additional tax of $550,000. 

The ULA tax cannot be avoided by conveying ownership interests (rather than the property).  Nor is the ULA affected if the buyer assumes existing debt as part of the total consideration being paid. In addition, the property value threshold subject to the ULA tax will be adjusted annually based on the consumer price index. Qualified affordable housing and government properties are exempt from the tax.

The net effect of the ULA tax will be substantial upward pressure on the pricing of real estate sales that exceed the dollar thresholds.

Sellers can try to shift all or a portion of the ULA tax to buyers, but buyers may balk at a sudden proposed jump in price at a time when the market is already being depressed by the effects of sharply higher interest rates.

That leaves sellers with two unpalatable options: (a) absorb at least a portion of the ULA tax, meaning a de facto price reduction, or (b) forego the sale.

The costs of the ULA tax will ultimately be passed along to consumers. Apartment rents will increase as building owners respond to higher property costs. The prices for goods and services will rise as manufacturers, retailers, and service providers try to recoup the higher costs for their factory, store, and office space.

Because the ULA tax is local, many sellers and buyers are now shifting their focus to properties outside of Los Angeles, adding additional energy to the vibrant markets in Texas, Florida, and other states.

Our office has identified potential options for dealing with the ULA taxes.  We would welcome the opportunity to discuss these with you.

Bob Weiss leads the real estate and finance departments at Valensi Rose, PLC.

By Bob Weiss