December 7, 2024
New Los Angeles ‘mansion tax’ has some sellers racing to close

New Los Angeles ‘mansion tax’ has some sellers racing to close

In the rarified air of luxury Los Angeles real estate, 30 days is a common closing timeline and two weeks would be speedy, explained Billy Rose, who’s guided buyers and sellers through high-end home purchases for years.

This week, work for Rose’s brokerage firm, The Agency, included two deals that went to closing in three days. There was one for $8.6 million and another for $14 million, said Rose, the co-founder and vice chairman. Both were cash transactions.
The catalyst is the City of Los Angeles’ “mansion tax,” a transfer tax that takes effect April 1.

While there’s already a 0.45% base tax rate on property transfers in Los Angeles, the new tax — supported by city voters last fall — adds another 4% on property sales valued above $5 million. It adds a 5.5% tax on properties above $10 million.

If those deals at The Agency had come together just a few days later, the $8.6 million sale would have had a $382,700 city transfer tax attached. The $14 million sale would have come with an $833,000 transfer tax, according a City of Los Angeles tax calculator.

The upcoming taxes have been focusing the minds of would-be sellers at a time when questions are swirling on the stock market’s next direction, what lies ahead for real estate and the health of the banking sector, Rose explained.

“There were a lot of sellers who all of the sudden got very sanguine about the reality of the market,” he said.

But are sellers leaving the city or the state now that they’ve avoided the tax?

Rose has heard grumbles but doesn’t foresee a major outflux. “My clients don’t want to go anywhere,” he said. Part of their view is “’I get taxed so I can enjoy this good weather,’” he noted.

It’s customary for sellers to pay the transfer tax, Rose said. “It is absolutely subject to negotiation and I suspect, going forward, it will be subject to negotiation.”

Earlier this month, Ari Afshar, founder of VOYAGE Real Estate team at Compass COMP, +5.21%, wrapped the all-cash closing on a $4.75 million house, representing the buyers. The sellers were moving to another pocket of L.A., he noted.

Afshar has heard of sellers lowering prices to prompt sales before April 1 and he’s heard of higher than usual commissions to the buyers’ brokers on the hopes they can get their clients moving. But he isn’t hearing of people pulling up stakes over taxes. “The people I’m talking to are not making these drastic decisions,” he said.

Many sellers aren’t getting shook by the tax, and if their house isn’t listed yet, it will get baked into the price, Afshar said. “I couldn’t be more bullish on L.A. as a real estate market.”

There’s a vigorous debate over whether rich households and businesses ought to be paying more federal and state income taxes. California, which already has a 13.3% top rate for state income taxes, is one of eight states where lawmakers are currently proposing a wealth tax.

At the same time, many states have been rolling back rates for broad swaths of residents. Counting West Virginia’s recent deal to trim income taxes, there have been 22 states to cut individual income taxes since 2021, according to the Tax Foundation.

Rich households are one sliver of America’s population. Their ability to move or stay put isn’t built on the same factors as a middle class families coping with high costs or retirees living on fixed incomes.

But demographics hint at the tension between taxes and location. Large scale moves out of major cities during the pandemic have slowed, with patterns of population growth and decline reverting to pre-pandemic levels. But the 10 fastest growing counties are in the South and West, according to the U.S. Census. In those regions, a number of states are lowering taxes or already have no income tax.

Intended, unintended consequences

Money from the Los Angeles transfer tax will go towards affordable housing projects and funding assistance for tenants who are at the risk of losing their homes, according to the city. The tax passed as a November ballot measure with 57% of the vote.

The city’s tax has been dubbed the “mansion tax,” but that’s “a misleading description,” according to Lewis Horne at the commercial real estate brokerage giant CBRE CBRE, +2.78%. In fact, the focus on high-end residential real estate misses where Horne thinks the real impact will be.

The tax also applies to sales on industrial, commercial and, retail buildings, office space and multi-family buildings, said Horne, president for advisory services for CBRE’s Greater Los Angeles, Orange County and Inland Empire region.

Efforts to address homelessness in the city are certainly worthwhile, said Horne — but this isn’t the way to do it.

In a county where builders and buyers have other nearby destinations without the extra transfer tax, “this isolates the city and puts a red line around the city and around new development,” Horne said.

Los Angeles County had a 9.7 million population in July 2022, down from 9.8 million one year earlier, according to the Census. Los Angeles County is the country’s most populous county, nearly double the population in second-place Cook County, Ill.

“It’s the story of unintended consequence,” he said. That could include more expensive leases and apartment rents.

There’s been a race to seal deals, he said. Some have come to fruition and others will miss the deadline. That’s going to spark new negotiations on price at a fragile time for banks to be analyzing loan opportunities, he said.

It’s been less than a month since Silicon Valley Bank and Signature Bank failed in rapid succession. “We’ve seen deals blow because the regional lenders have pulled out, because of the uncertainty,” Horne said.

The imminent tax is not the breaking point for companies deciding to do business in Los Angeles or California, but it heavies the burden, Horne said. “It’s the death of a thousand cuts.”

Criticisms and misgivings over the tax are overblown and unfair, said Estuardo Mazariegos, ACCE’s Los Angeles co-director for the ACCE Institute, a community based organization with chapters across the state. Ahead of the vote, Mazariegos knocked on doors to drum up support for the city ballot.

“This is not going to create a barrier for any type of development,” he said. If anything, Mazariegos said it would generate good-paying construction jobs for more affordable housing while defraying the social services costs that come with trying to assist a person on the brink of homelessness.

If costs get passed along to workers and tenants because of the tax, that’s a choice from building owners. “They are deciding they can’t take a small tiny fraction of a hit on their mega profits,” he said.

Mazariegos also has no patience for the anecdotes of accelerated housing deals.

“They’re clowns, straight up. There’s no other way to say it,” he said.

Uncertainties

Deep-pocketed buyers and sellers have been trying to work deals as they grapple with known deadlines and an unknown future about the market. But one uncertainty is the fate of the tax itself.

One lawsuit alleges the tax is invalid under California law and a state ballot scheduled to go to voters in November takes aim at the tax. A spokesperson for the city’s law department declined to comment on ongoing litigation.

At Rose’s firm, clients aren’t waiting to find out.

Realtor Jason Walker represented the buyers in a deal for a $6.75 million home in L.A.’s Hollywood Hills section. The purchase closed Wednesday, nine days after the money went into escrow.

The listing price on the house in the “modern farmhouse” style came down from $6.99 million because the sellers had their eyes on the tax, Walker explained.

Another potential buyer had an entourage of specialists, but the sellers worried the retinue’s input and opinions could slow the sales process.

Walker said his clients were going to finance the purchase, but switched to cash so they could move quickly — another example of the speed needed for the moment. “Everyone, developers, sellers, we’re all hustling,” he said.

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