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Tax

Measure ULA: Los Angeles Transfer Tax on Real Property Sales

At a Glance

Main Takeaway

For real estate owners in Los Angeles, the recently passed Measure ULA, or the Homelessness and Housing Solutions Tax, may significantly impact your tax liability when buying or selling a property.

Despite the tax’s laudable intentions, it may have far-reaching effects on the city’s real estate market and the purchase, development, and sale of all properties.

Next Step

Learn more about Measure ULA, its tax implications for you as a property owner in Los Angeles, and how Windes can help you minimize your tax burden with the right accounting strategies.

 

What is Measure ULA?

The Homelessness and Housing Solutions Tax (Measure ULA) is a ballot measure passed by the City of Los Angeles on November 8, 2022. According to a UCLA white paper, the measure intends to raise nearly $923 million annually for housing production, rent relief, and income support to reduce homelessness in the city.

Measure ULA increases transfer taxes on real estate sales over $5 million to raise these funds. The report estimates that around 4% of real estate transactions will be affected annually and that 72% of the measure’s revenue will come from property sales over $10 million. A lesser number of condos or single-family homes, around 3%, would meet the requirements for the new taxes.

 

What Provisions do Measure ULA Set?

Measure ULA is colloquially referred to as the “mansion tax” because it only applies to high-dollar real estate. However, the measure applies to multiple real property asset classes, including commercial and residential real estate and vacant land.

Due to the high number of commercial properties in Los Angeles, most funds will likely come from selling real estate like apartment buildings or commercial properties rather than residential mansions.

Current law requires all transfers of real property, no matter the value, to have a documentary transfer tax applied. This tax is applied by Los Angeles County and the City of Los Angeles at tax rates of $0.55 per $500 and $4.50 per $1,000, respectively (a combined rate of $5.60 per $1,000). These fees are assessed and collected during the closing on the sale of a property and are usually paid by the buyer.

Under Measure ULA, properties valued over $5 million and less than $10 million are subject to an additional 4% transfer tax. Real estate property valued at more than $10 million has an additional transfer tax rate of 5.5%. Additionally, the new measure includes encumbrances and liens on the property when determining its value, which is in direct contrast to current policies.

For example, you conduct a property sale valued at $60 million. Under the existing rules, you would pay $336,000 in transfer taxes ($66,000 in LA County taxes + $270,000 in city taxes). With the additional transfer tax of 5.5%, you would pay an extra $3,300,000 in taxes at closing.

Under Los Angeles transfer tax rules, taxes are due regardless of whether a property is sold at a gain or loss, and thresholds will be updated yearly. The new law went into effect on January 1, 2023, but it will not apply to property sales until April 2, 2023.

Transfers taxes for properties under $5 million will continue to follow normal guidelines per Los Angeles County.

Potential Impacts of ULA

The ripple effect created by Measure ULA throughout the Los Angeles real estate market will be far-reaching. It is important for real estate property owners and investors to understand these potential impacts and how they will affect tax liability and planning.

 

Increased Development Costs

The new transfer taxes have an indirect effect on housing development in Los Angeles. Property owners will likely increase rents to cover the higher cost of purchasing real estate, countering the measure’s intended objective.

 

Less Investment in Los Angeles Properties

When development costs are higher and potential rent increases, the measure pushes investors to look elsewhere for properties. Instead of drawing investment into real estate in the county, they may invest in other locations outside city limits where they will not have to pay the higher tax rate.

Marginal Impact on Homelessness

Some critics of the measure believe it will have a marginal impact on homelessness when compared to the harm to investment value, similar to the 2016 Measure HHH. For example, a RAND corporation article discussed Proposition HHH, a $1.2 billion bond that was supposed to fund the development of 10,000 housing units for the homeless. It found that Prop HHH led to the construction of fewer units at a higher price than anticipated.

 

What Property Owners Need to Know

Because Measure ULA has yet to go into full effect in Los Angeles, it is difficult to know the exact impact it will have on property owners who buy and sell high-dollar real estate. In order to protect yourself, you can work with a real estate accounting firm like Windes to help you navigate the challenges and implement accounting strategies to minimize your tax liability under the new law.

You can use strategies like negotiating with the seller to split the transfer tax at closing and taking advantage of other tax credits, incentives, or deductions to offset the extra tax liability. Additionally, Windes can help you explore solutions like splitting multi-parcel properties into multiple sales transactions, depending on any new regulations enacted by Los Angeles.

Windes will help you organize your real estate deal structure and incorporate the new transfer tax policies into your underwriting process for current and future projects.

 

Manage Your Property Taxes Effectively

The shifting tax landscape surrounding the Los Angeles real estate market requires the help of a professional accounting advisory firm that can help you effectively navigate the changes.

Windes is a tax and accounting firm based in California with experience in the Los Angeles real estate market. We provide real estate accounting services to high-net-worth individuals and private businesses and can help you lower your tax liability with the right accounting strategies.

Contact us today to learn how we can help you understand how Measure ULA may impact your next real estate transaction.

 

Christy Woods, CPA
Christy Woods, CPA, MST

Partner-in-Charge, Tax – Long Beach
Real Estate Services Practice Leader

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