Rich LA Property Owners Scramble to Avoid New Tax

Jan 13, 2023 | Blog, Uncategorized

Affluent homeowners in Los Angeles are already searching for ways to avoid a new property sales tax. Several weeks ago, LA voters backed a new measure that affixes a one-time transfer tax to property sales totaling more than $5 million. Almost any legal professional, whether a cryptocurrency tax lawyer or a general tax attorney, likely anticipates at least a few calls from property owners seeking advice about the new law.

Rich Property Owners Seek to Avoid Financial Repercussions of Measure ULA

The new ordinance is called Measure ULA, an initialism for “United to House LA,” and was put forth as a “mansion tax.” The tax is on somewhat of a sliding scale, and starts with a 4 percent tax on the sale of any property over $5 million, but escalates to 5.5 percent for any sale totaling $10 million or more.

The new ordinance takes effect in April and is already creating a buzz in the Los Angeles real estate market. Although certain analysts claim that the profitability of these big-ticket transactions will not be phased, other individuals are afraid the tax will motivate high-end real estate developers to set up shop elsewhere and hinder the construction of the type of multifamily housing it was created to promote.

LA Mansion

Developers and Homeowners Scramble to Sell Before Tax Law Takes Effect

A California back-taxes attorney has learned that many agents have mentioned that developers and homeowners are already showing signs of anxiousness to sell before the April 1 deadline. Real estate agents have stated that some homeowners who were on the fence about selling their properties are now scrambling to complete the sales before April to avoid the tax. Some, however, are a bit more creative.

Questionable Strategies May Be Attempted by Some Property Owners

Due to the $5 million threshold, certain property owners may consider splitting up their properties to create smaller parcels which would be owned by different individuals or corporations. If this is done successfully, the tax can be avoided altogether. This strategy might not stand up on audit.

Creating agreements off the books is another no-no, but one that may be embraced by some homeowners. For instance, a sale can be kept under $5 million if the home was initially marketed for $6.5 million, but the property owner came to an agreement with the buyer to sell the home for $4.9 million and the home’s furniture for $1.6 million. California tax attorneys have stated that while these methods might trigger penalties and possible prosecution, individuals may nevertheless attempt such maneuvers.

Certain Legal Professionals Claim This Tax Discourages Building of Multifamily Homes

The transfer tax will provide money for the construction of affordable housing, but some financial analysts worry the private developers will be discouraged from constructing multifamily housing. Some legal professionals cite a domino effect, claiming that although the tax is on properties worth $5 million or more, the money must come from somewhere, and that may create a trickle-down effect, leading to higher rents.

Peter Dreier, a professor at Occidental College, disagreed with that argument, stating that many landlords already charge maximum rent and that the new tax will only impact house flippers. The measure hasn’t gone into effect yet, but some homeowners may be seeking the advice of a California Franchise Tax Board attorney in the future if they attempt to circumvent the new tax.