Understanding Los Angeles’ Mansion Tax: What It Means and Where It Applies

The City of Los Angeles implemented Measure ULA, commonly known as the “Mansion Tax,” on April 1, 2023. This tax is designed to generate revenue for affordable housing and homelessness prevention programs. If you are involved in high-value real estate transactions in the area, it’s crucial to understand how this tax works and which cities it affects.

What is the Mansion Tax?

Measure ULA imposes a transfer tax on real estate transactions that exceed specific value thresholds:

• 4% tax on properties sold between $5,150,000 and $10,300,000
• 5.5% tax on properties sold at $10,300,000 or more

These thresholds are subject to annual adjustments based on inflation rates. The tax is typically paid by the seller at the time of closing.

Example Calculation

If a seller sells a property in Los Angeles for $6,000,000, the tax calculation would be:

• 4% of $6,000,000 = $240,000 owed in Mansion Tax.

For a property sold at $12,000,000, the tax calculation would be:

• 5.5% of $12,000,000 = $660,000 owed in Mansion Tax.

Who Pays the Mansion Tax?

The Mansion Tax is typically paid by the seller at the time of closing. However, in some cases, buyers and sellers may negotiate the tax payment as part of their transaction agreement. Understanding this obligation is critical when structuring deals to ensure clarity and compliance.

How to Avoid the Mansion Tax

While Measure ULA applies to many high-value properties, there are some legal ways to minimize or avoid it:

• Selling in Exempt Cities: As outlined below, properties outside the City of Los Angeles are not subject to the tax.
• Breaking Up Transactions: Some property owners attempt to split transactions into multiple lower-value sales to remain under the tax threshold. However, this strategy has legal and tax implications and should be approached with caution.
• 1031 Exchange: Investors using a 1031 exchange to reinvest proceeds into another investment property may be able to defer taxes, though this does not eliminate the Mansion Tax.
• Entity Transfers: In some cases, structuring a sale through an entity (LLC or trust) may provide tax advantages, but this requires careful legal structuring.

Where Does the Mansion Tax Apply?

The Mansion Tax only applies to properties located within the City of Los Angeles. Properties in other municipalities and unincorporated areas of Los Angeles County are not subject to this tax.

Cities Excluded from the Mansion Tax

Since Measure ULA is specific to the City of Los Angeles, several neighboring cities and communities are exempt from this tax. Here are some key cities where the tax does not apply:

Independent Cities Not Subject to the Mansion Tax:

• Beverly Hills – Known for its luxury real estate market, this city has its own tax regulations.
• West Hollywood – Incorporated as a separate city, it operates under different tax structures.
• Santa Monica – A coastal city with its own real estate regulations and taxation policies.
• Malibu – Luxury properties in this beachfront city are exempt from Los Angeles’ tax laws.
• Pasadena – Located in Los Angeles County but governed separately.
• Glendale – A major city with its own tax and governance structure.
• Burbank – Home to entertainment studios and exempt from the ULA tax.
• Culver City – An independent city with distinct municipal regulations.
• Manhattan Beach – A high-end coastal community not subject to LA’s transfer tax.
• Hermosa Beach – Another beachfront city with independent governance.
• Redondo Beach – Part of the South Bay, outside the jurisdiction of LA’s tax.
• San Marino – Known for its exclusive residential market, exempt from the ULA tax.
• Palos Verdes Estates – A luxury enclave with separate tax structures.
• Rolling Hills Estates – A gated community with its own municipal governance.
• La Cañada Flintridge – A wealthy neighborhood outside of LA’s jurisdiction.

Implications for Buyers and Sellers

• For Sellers: If you own high-value property in Los Angeles, this tax could significantly impact your net proceeds. Sellers may factor the cost into their pricing strategies.
• For Buyers: While the tax is charged to sellers, it could influence listing prices and negotiations, especially for properties just above the tax threshold.
• For Investors: Understanding the jurisdictional boundaries of Measure ULA is essential for making informed real estate investment decisions.

Consult With a CPA and Real Estate Attorney

Navigating the complexities of the Mansion Tax requires careful planning. To ensure compliance and explore potential tax-saving strategies, it is highly advisable to consult with a Certified Public Accountant (CPA) and a real estate attorney. These professionals can help you structure transactions efficiently and ensure legal and financial compliance.

Conclusion

The Mansion Tax in Los Angeles adds a financial consideration for those involved in high-value real estate transactions. However, it is crucial to note that numerous cities in Los Angeles County remain unaffected. Whether you are buying, selling, or investing in real estate, knowing where this tax applies can help you make more strategic decisions.

For those dealing in luxury properties, working with experienced real estate professionals and tax advisors is essential to navigate these regulations effectively.

Rana Real Estate Group is a trusted name in real estate, offering expert assistance for all your property needs. Whether you’re buying, selling, or investing, their experienced team provides tailored solutions and personalized service to help you achieve your goals. With a focus on integrity and transparency, they guide you through every step of the process, ensuring a smooth and successful transaction. Whether you’re a beginner or seasoned in real estate, Rana Real Estate Group is here to support you every step of the way.

Rana Khanjani, MBA Specializing in Commercial, Residential, and Land