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In advance of the ULA Tax going into effect on April 1, L.A. homesellers have been scrambling to offload their properties priced at $5 million or higher in an attempt to avoid the dreaded “mansion tax,” as it’s now known.
The new tax, which was approved in November by a margin of 58 percent to 42 percent, will tax homesellers 4 percent on their transactions priced between $5 million and $10 million, and tack a 5.5 percent tax onto transactions priced above $10 million. Those taxes will be in addition to LA’s existing property transfer tax of 0.45 percent.
The anticipated $600 million to $1.1 billion in tax revenue earned through the tax will be used for affordable housing and homelessness prevention programs.
To make their multi-million-dollar properties more attractive and move them more quickly, some sellers have been cutting their asking prices precipitously and negotiating other add-ons into contracts.
Paul Salazar of the Paul Salazar Group at Hilton & Hyland said he’s been receiving dozens of emails from agents per day over the course of the last two months with subject lines like, “Pre-ULA special!” that offer discounts on properties before the tax goes into effect.
“They’re just trying anything they can do to get something under contract before this new tax goes into place,” Salazar told Inman.
A nearly 17,000-square-foot mansion at 638 Siena Way represented by Tomer Fridman and Sally Forster Jones at Compass was originally listed for $47.5 million in April 2022 and saw a price cut to $42.5 million in September 2022. After the ULA Tax was approved and April inched closer, the price was cut yet again to $36.95 million in February 2023.
By March, Marc Noah of Sotheby’s International Realty had a buyer for the property. The deal went from contract to close in six days to beat the start of the ULA Tax, with yet another price slash, for a final closing price of $26 million, a Sotheby’s rep told Inman.
Other ways Salazar has seen agents and their clients get creative in contracts in anticipation of the tax going into effect is by making offers that throw a home’s furniture into the deal — which may be worth half a million or so on its own — and then dropping the asking price of the property so that it drops just below the $5 million tax threshold.
Salazar also said that he’s noted an exponential increase in sales from the $5 million to $10 million range over the past three months as sellers become more motivated to offload their properties. In the areas he services from roughly downtown L.A. to Malibu, there were 26 sales in January of properties priced between $5 and $10 million, 48 sales of properties in that price range in February and 100 sales of those properties in March (not including March 31, which Salazar said is sure to see tons of sales close as the final day before the tax goes into effect).
Given the current market uncertainty (including bank collapses and stock market fluctuations) that has led many buyers to keep one foot in the market and one foot out, Salazar added, that steady and significant increase of sales in that price range can’t really be chalked up to the market heading closer to the busy highs of the spring and summer buying. More likely, that activity is directly related to the ULA Tax going into effect.
Salazar also noted that the impacts of the impending ULA Tax can also been seen in a year-over-year comparison of the average price-per-square-foot on properties between that $5 to $10 million price range in the markets he services. During the first quarter of 2022, the average price-per-square-foot on $5 to $10 million properties was $1,655. As of Q1 2023, that figure dropped to $1,493 as sellers slashed prices and scrambled to get properties sold before the tax went into place.
Ernie Carswell of Ernie Carswell & Associates at Douglas Elliman said that the tax, which he felt was “slipped in, seemingly in the middle of the night, across this city’s ballots” with little education or preparation provided to voters about the measure had caused many sellers across L.A. to make rash decisions in a rush to sell before April 1.
“Some of them panicked and some of them under sold their houses below market value because of the tax, which was unfortunate,” Carswell told Inman. “I saw a house in Bel Air that was priced at $36 million that closed in three days, obviously to get in under the deadline, at $26 million. The tax was not [going to be] $10 million. That was a dramatic reaction … I’ve seen a number of those closings this last week of March.”
Carswell added that he felt that the ULA Tax was framed to voters as a tax that would solely impact sellers of $5 million-plus properties, but the reality is that many buyers, and potentially even real estate agents, will end up having to foot the bill for the tax.
“Many people that voted for [the ULA Tax] I think had no idea what they were voting for,” Carswell said. “And so I think it was an unfair voting result because I think there was a good percentage of people that had no idea how it would impact the city.”
“They say the only two things in life that are certain are death and taxes,” Carswell continued. “Who’s going to really end up paying this are the buyers. Let’s just be real. Sellers, as of April 1, will start adjusting their acceptable selling prices to include this 4 or 5 percent tax to their bottom line. So guess who’s going to pay it? The buyers, which are not the people who thought they would be paying it on the ballot.”
Carswell said he had braced himself to face sellers who might ask him, as their agent, to cover the cost of the tax, but fortunately, has not had any clients who have asked this of him yet.
The tax, he added, will also likely have the unintended effect of dissuading many developers to build more homes in a city that’s been in dire need of more inventory for years.
Starting next week, Carswell said he anticipates things to slow down a bit as the tax goes into effect and sellers no longer feel the pressure of trying to beat the April 1 deadline.
“[Buyers] saw an opportunity for weakness in the sellers’ stance and they took advantage, and okay, that’s fine. But that stops next Monday,” Carswell said. “They’ll have to buy homes by traditional negotiation methods without having the benefit of a tax that’s scaring the bejesus out of some sellers. So I think that will resume a type of normalcy. It’s just going to be back to our future of how the city must solve its low inventory of available housing for people of all price points.”
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