09 December 2022
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Last month Los Angeles voters approved Measure ULA, imposing a new tax on all real property sales or transfers over $5 million. This will affect all parties involved in a real property transaction, and it is important to understand the implications of the measure before negotiating on a new project. My colleague David Tabibian, partner in JMBM’s Real Estate Department and Global Hospitality Group®, explains the initiative and its potential impact below.
Measure ULA Approved: New Transfer Tax on All Real Property Sales Over $5 Million in the City of Los Angeles
In an effort to combat the homelessness crisis, Measure ULA (aka the “Homelessness and Housing Solutions Tax”) was recently approved by voters in the City of Los Angeles on November 8, 2022. The measure imposes a very significant increase in transfer taxes on certain real property sales within the City of Los Angeles, which will have far-reaching impacts throughout the real estate market. It is anticipated that the new tax will generate approximately $600 million to $1.1 billion annually in order to fund affordable housing and tenant assistance programs administered by the Los Angeles Housing Department. Given the high cost of this new tax, it is important that buyers, sellers and developers fully understand its implications.
What Does Measure ULA Do?
Although commonly referred to as the “mansion tax,” it is actually much broader in scope since it applies to all real property asset classes, including residential and commercial properties as well as vacant land. In fact, many industry experts anticipate much of the revenue generated from Measure ULA will instead come from sales of apartment buildings and commercial properties as opposed to sales of mansions.
Currently, unless a specific tax exemption applies, all transfers of real property, regardless of value, are subject to a documentary transfer tax from both the City of Los Angeles and the County of Los Angeles at a combined rate of $5.60 per $1,000 of consideration. Simply put, it is a 0.56% tax on the consideration received and is collected at the time of closing.
Under the new measure, however, sales of residential and commercial real property valued at over $5 million but less than $10 million would be subject to an additional transfer tax at the rate of 4%, and sales of real property valued at $10 million or more would instead be subject to an additional tax at the rate of 5.5%. In contrast to the existing documentary transfer tax, the value of the property for purposes of the measure will include the value of any lien or encumbrance remaining on the property when it is sold so that the tax is on the gross value, not just the consideration received. Moreover, the tax would be due regardless of whether it is being sold at a gain or a loss. The thresholds under the measure will be adjusted each year for inflation. Although Measure ULA will become law on January 1, 2023, it applies to property sales occurring on or after April 1, 2023. CONTINUE READING →