Los Angeles Mansion Tax Sparks Seller Concerns And Market Uncertainty

Mortgage News May 8, 2023

On April 1st, 2023, the city of Los Angeles implemented a new tax called the “mansion tax.” This tax is levied on homes that sell for over $5 million, with a 4% rate, and homes that sell for over $10 million, with a 5.5% rate. The tax is designed to raise $1 billion per year to help solve the homeless crisis in the city and create more affordable housing options.

Real estate agents are advising their wealthy clients to sell their homes before the transfer tax takes effect, but the market in Los Angeles is already soft, creating challenges for sellers. Many brokerages are also warning their agents to be cautious about giving financial or legal advice to avoid the tax.

The new tax has created downward pressure on prices, as owners are now concerned about a higher tax bill. Homebuyers are making cash offers and trying to close quickly, often at a discount. This has led to dramatic reductions in prices for many homes, as sellers want to offload their properties quickly.

Tax professionals are working with clients to identify potential loopholes, such as splitting deals into two transactions or having separate buyers or trusts buy properties with a plan for tenancy in common. However, most who work in real estate in Los Angeles are concerned about the tax and its effects on individual buyers, sellers, and developers. When developers slow their work in the city, it will have a ripple effect on the economy, including construction crews, architects, and plumbers.

Those who support the new tax claim that it will lead to a surge in construction, primarily focused on affordable housing solutions. According to a research paper published by the authors of Measure of ULA, the tax could potentially generate 43,000 new jobs in the construction industry.

In the short term, the mansion tax has caused a flurry of activity as sellers try to avoid the tax, but it is also leaving some buyers hesitant to purchase luxury properties in the city knowing they will owe a big tax bill if they ever decide to sell. Only time will tell what the long-term results of the tax will be.

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