In California, particularly in cities like Los Angeles, property owners are navigating new financial realities due to the mansion tax. Officially labeled Measure ULA, the United to House L.A. proposition, this tax affects high-end property sales by imposing a levy on transactions exceeding $5 million. For homeowners, investors, and sellers involved in the California real estate market, understanding this tax is crucial.

Consulting a financial advisor can offer tailored advice, ensuring your real estate strategy aligns with state regulations.

Understanding California’s Mansion Tax and Its Effects

What Is the California Mansion Tax?

California does not have a statewide mansion tax; however, Los Angeles implements one for the city. This mansion tax is a real estate transfer tax specifically imposed on high-value property sales. Unlike annual property taxes, which homeowners typically pay every year, this tax is assessed at the point of sale.

Who Does It Apply To?

The tax primarily targets owners of residential and commercial properties sold at prices above $5.15 million, effective June 2024. This includes those selling single-family homes, condominiums, apartment complexes, and certain commercial properties.

Where Is It Enforced?

While California features various local transfer taxes, the Measure ULA tax specifically applies within Los Angeles. Notably, several affluent neighborhoods outside the city, such as Beverly Hills, Malibu, and Calabasas, are exempt from this levy.

In addition to Los Angeles, other California jurisdictions that have enacted similar “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 rates are based on the property’s sale price. For Los Angeles, the rates are as follows:

• Properties sold for $5.15 million to $10.3 million are subject to a 4% tax.
• Properties sold for over $10.3 million incur a 5.5% tax.

These rates are significantly steeper than conventional real estate transfer taxes, making advance planning essential for sellers.

When Did It Take Effect?

The mansion tax took effect in Los Angeles on April 1, 2023, following voter approval of Measure ULA. In its first 10 months, the tax generated $192 million and serves as a major funding source for affordable housing and homelessness prevention initiatives.

How Is It Paid?

The seller typically covers the mansion tax at closing. For instance, if a property sells for $6 million, the seller is responsible for paying 4% of the sale price, adding up to $240,000 in mansion tax fees.

Implications of the Mansion Tax on Real Estate

The mansion tax has the potential to escalate the costs associated with high-value property transactions, potentially discouraging some buyers and leading to slower sales in upper price brackets. In markets like Los Angeles, where property prices frequently surpass the tax threshold, this could reshape pricing and buyer demand. Here are four ways the mansion tax could influence the real estate market:

• Luxury home sales slowdown: Some luxury homeowners may be hesitant to sell due to the additional tax, resulting in fewer high-value property transactions, with many sellers delaying or withdrawing their listings.
• Rise in off-market deals: To bypass the mansion tax, some property owners are opting for off-market transactions or private sales, structuring deals to minimize tax implications.
• Impact on commercial real estate: The tax also burdens commercial property sellers, leading to potential increases in rents or shifts in investment strategies.
• Encouragement of smaller transactions: Sellers may adjust pricing to keep sales under the tax threshold, altering market dynamics and negotiations.

California Mansion Tax – Exemptions

Here are three noteworthy exemptions:

• Government-owned properties: Properties sold by government entities, including city, county, or federal organizations, are typically exempt from the mansion tax.
• Nonprofit organizations: Sales involving nonprofit entities may be exempt, especially for transactions aimed at promoting charitable objectives, such as low-income housing projects.
• Affordable housing developments: Transactions involving properties intended for affordable housing construction may qualify for exemptions, depending on the specifics of the buyer’s intentions.

California Mansion Tax – How to Avoid

Here are three strategies to consider for avoiding the mansion tax:

• Sell below the tax threshold: Since the tax applies only to sales of $5.15 million or more, sellers might negotiate prices below this limit.
• Split the transaction: Some sellers consider breaking up transactions by separating land and building sales or splitting ownership. Ensure compliance with legal standards and consult a tax expert in California for guidance.
• Gift or transfer ownership: Transferring property to an heir or family member before a sale can potentially avoid taxes, especially when performed through estate planning or trusts. Consulting a tax expert in California can clarify if this is applicable to the mansion tax.

Bottom Line

The mansion tax, while not applicable statewide, significantly impacts high-value real estate transactions in cities like Los Angeles. The initiative aims to support affordable housing programs but may also increase costs for sellers and investors. Property owners facing this tax should consult with a tax expert for effective strategies.

Tax Planning Tips

• If you’re looking to minimize tax liabilities, a financial advisor specializing in tax planning can help enhance your financial strategies. Finding a suitable financial advisor is easier than you think. SmartAsset’s free tool connects you with vetted financial advisors in your area, and you can schedule a free introductory call to assess which advisor fits your needs. If you’re ready to begin your search for an advisor to meet your financial goals, start now.
• Use SmartAsset’s tax return calculator to estimate how much your next tax refund or balance may amount to.

Photo credits: ©iStock.com/Miljan Živković, ©iStock.com/simonkr, ©iStock.com/Jirapong Manustrong

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