Los Angeles ‘mansion tax’ is coming, sending sellers into a sprint through April 1st

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Ahead of the ULA tax going into effect on April 1, Los Angeles home sellers have struggled to get rid of their properties worth $5 million or more in an effort to avoid the dreaded “Mansion Tax” as it’s now known.

The new tax, which was approved in November by a margin of 58 to 42 percent, would tax home sellers at a rate of 4 percent on transactions valued between $5 million and $10 million, and a 5.5 percent tax would apply to transactions above 10 million dollars. These taxes will be added to Los Angeles’ existing 0.45% property transfer tax.

Expected tax revenues of $600 million to $1.1 billion generated through the tax will be used for affordable housing and homelessness prevention programs.

To make their multi-million dollar properties more attractive and sell them faster, some sellers are drastically cutting asking prices and negotiating other additions to contracts.

Paul Salazar | Hilton and Highland

Paul Salazar of the Paul Salazar Group at Hilton & Hyland said he’s been receiving dozens of emails a day from agents for the past two months with subject lines like “Special before ULA!” who offer discounts on real estate before the tax takes effect.

“They’re just trying to do everything they can to get something on the contract before this new tax goes into effect,” Salazar told Inman.

The nearly 17,000-square-foot mansion at 638 Siena Way, featured by Tomer Friedman and Sally Forster Jones of Compass, was originally listed for $47.5 million in April 2022, with the price reduced to $42 in September 2022. 5 million dollars. April was approaching, the price was reduced again to $36.95 million in February 2023.

By March, Mark Noah of Sotheby’s International Realty had a buyer for the property. The deal went from contract to close in six days to beat the start of the ULA tax, with another price cut, and the final closing price was $26 million, a spokesman for Sotheby’s told Inman.

A mansion at 638 Siena Way that recently contracted after several price cuts to close before the ULA tax goes into effect April 1 | Credit: Mike Kelly

Other ways Salazar has seen agents and their clients get creative with contracts in anticipation of the tax going into effect is by making offers that include home furniture in the deal that can be worth half a million or so on its own. and then dropping the asking price of the property so that it falls just below the $5 million tax threshold.

Salazar also said he saw an exponential increase in sales from $5 million to $10 million in the past three months as sellers became more motivated to sell their properties. In the areas it serves roughly from downtown Los Angeles to Malibu, there were 26 properties sold in January priced between $5 million and $10 million, 48 sales of properties in that price range in February, and 100 sales of those properties in March (not counting March 31). , which Salazar says is bound to see tons of sales on the last day before the tax goes into effect).

Salazar added that given the current market uncertainty (including bank crashes and stock market fluctuations) that has kept many buyers with one foot in the market and the other out of the way, a sustained and significant increase in sales in this price range cannot be achieved. . attributed to the fact that the market is approaching the brisk highs of spring and summer buying. Most likely, this activity is directly related to the introduction of the ULA tax.

Salazar also noted that the impact of the impending ULA tax can also be seen in the annual comparison of the average price per square foot for properties in the $5 million to $10 million price range in the markets it serves. In the first quarter of 2022, the median price per square foot in $5 million to $10 million properties was $1,655. As of the first quarter of 2023, that figure had dropped to $1,493 as sellers slashed prices and struggled to sell properties before the tax went into effect.

Ernie Carswell | Douglas Elliman

Ernie Carswell of Ernie Carswell & Associates at Douglas Elliman said the tax, which he believes was “placed apparently in the middle of the night on this city’s ballot” with little informing or preparing voters about the measure, caused many sellers across Los Angeles to make rash decisions in a rush to sell before April 1st.

“Some of them panicked and some of them sold their homes below market due to the tax, which was unfortunate,” Carswell told Inman. “I saw a house in Bel Air worth $36 million that was closed in three days, apparently to be delivered on time, for $26 million. The tax was not (will be) $10 million. It was a dramatic reaction… I saw several of these closures in the last week of March.”

Carswell added that he believes the ULA tax was presented to voters as a tax that would solely affect sellers of properties over $5 million, but the reality is that many buyers and possibly even real estate agents will eventually have to pay the tax. . tax bill.

“A lot of the people who voted for[the ULA tax]I think, had no idea what they were voting for,” Carswell said. “And so I think it was an unfair voting result, because I think there was a good percentage of people who had no idea how it would affect the city.”

“They say two things in life are certain—death and taxes,” Carswell continued. “Who will really pay for this is the buyers. Let’s just be real. Sellers from April 1 will begin to adjust their eligible selling prices to include this 4 or 5 percent tax in their profits. So guess who’s going to pay? Buyers, not the people who thought they would pay by ballot.”

Carswell said he was preparing to meet with salespeople who might ask him as their agent to cover the cost of the tax, but fortunately he hasn’t had any clients yet who would ask him to do so.

He added that the tax is also likely to have the unintended effect of discouraging many developers from building more homes in a city that has been in dire need of more inventory for years.

Starting next week, Carswell said he expects things to slow down a bit as the tax goes into effect and sellers no longer feel pressure to meet the April 1 deadline.

“(Buyers) saw an opportunity for weakness in the sellers’ position and took advantage of it, and that’s okay. But it will stop next Monday,” Carswell said. “They will have to buy houses through traditional negotiation methods without using the tax that scares the life out of some sellers. So I think it will resume normal life. We will just go back to our future, how the city should address the lack of affordable housing for people of all price brackets.”

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Email Lillian Dickerson