NEW TAX ON REAL ESTATE TRANSACTIONS NEGATIVELY IMPACTS SALES
Measure ULA imposes new tax on real estate transactions. The city of Los Angeles’ new Homelessness and Housing Solutions Tax establishes a 4 percent to 5.5 percent fee on all real property sales priced over $5 million, starting April 1, 2023. Dubbed a mansion tax, this voter-approved measure will significantly impact not only the single-family housing market, but also commercial and multifamily properties. Property owners will need to adjust near-term hold strategies, and investor demand for citywide listings could decrease or shift to other options in the metro area. Recent sales activity solidifies the significance of the measure’s reach. Spanning the past 12 months ending June, nearly 760 apartment, retail, office and industrial listings each sold for more than $5 million, representing 44 percent of the metro’s trade volume. Furthermore, based on current property assessments, roughly 18,100 citywide buildings could be potentially impacted. The threshold for taxation will be adjusted annually based on a chained Consumer Price Index, suggesting properties in the $5 million to $10 million tranche won’t eventually be subject to the 5.5 percent tax rate because of inflation alone.
Owners face short interval to sidestep local taxation. Investors mulling a potential property sale as the year closes out have a roughly five-month window in which to execute a trade without being subject to the new tax. A boost in citywide listings volume may occur during this interval as a result, providing additional opportunities for active investors seeking longer-term holds in the city of Los Angeles. Still, buyers will weigh the taxation that awaits at the end of a potential hold when contemplating a near-term purchase. This may further alter buyer and seller pricing expectations during a span of rising interest rates and more stringent lending practices.
* Sources: Marcus & Millichap Research Services; CoStar Group, Inc.; Real Capital Analytics; RentCafe