Mansion tax deadline looms, putting LA agents in tough spot

The clock is ticking for Measure ULA taxes on the sale of luxury homes to take effect in the city of Los Angeles — and it puts agents in a tough spot.

They have advised their clients that, if possible, they should sell before the transfer tax begins on April 1. However, the market is slow, and brokerages are advising agents to be careful about giving any legal or financial advice on avoiding the tax.

It’s a 4 percent tax on deals for homes above $5 million, with the rate increasing to 5.5 percent on deals above $10 million. The transfer tax’s supporters say that it will raise around $1 billion annually to solve Los Angeles’ homelessness crisis and create more affordable housing.

Litigation caution

Stephen Shapiro, co-founder of Beverly Hills boutique brokerage Westside Estate Agency, has told his agents to steer clear of giving financial and legal advice.

“Everyone with a house over $5 million is asking questions. But it’s improper to give advice when you’re not qualified to give it,” Shapiro said. “In this world, people get sued for anything. You’re talking millions or hundreds of thousands of dollars for a lawsuit for giving incorrect advice. You can be buried.”

He has advised sellers to direct financial questions on the mansion tax to real estate attorneys and accountants.

However, there is work for agents with homeowners who have the desire and ability to sell before April 1, Shapiro said, because they can save a lot of money. He also forecast that buyers will save money if they purchase a home before April. Some sellers might increase the asking price for their listings so they can absorb the cost of the taxes.

The looming tax comes at a time when the market is slow. Completed sales of luxury single-family homes in Los Angeles declined 13 percent in the fourth quarter of 2022, compared to the third quarter. In a year-over-year comparison, completed sales of luxury single-family homes in Los Angeles declined more than 51 percent, according to a report released by Douglas Elliman.

Looking for loopholes

Since Measure ULA passed, tax professionals and others have been brainstorming about loopholes. Ideas in circulation include splitting up a deal into two transactions, one for the land and another for the structures on the land. The idea is to keep the sums paid for different portions of a listing below Measure ULA’s tax threshold, according to a recent TRD article.

Another idea is for separate buyers or trusts to purchase a property with a tenancy in common plan, where separate owners take shares of a property. With this scenario, escrows would not close at the same time, but rather within a few days of each other. Separate transactions from the individual trusts would whittle down a property’s price so it wouldn’t pass Measure ULA’s threshold, according to plans heard on the street, said Michael Nourmand, president of Nourmand & Associates, an independent real estate firm in Beverly Hills.

Jason Oppenheim of luxury firm The Oppenheim Group forecast that Measure ULA would hurt the economy by taking momentum from developers. After Measure ULA passed, he pulled out of a deal to build a mansion on a teardown in West Hollywood’s Bird Streets enclave.

“The profits were not guaranteed,” Oppenheim said of the project. “But the taxes were guaranteed.”

He also forecast that people building houses, such as plumbers, construction crews and architects would lose out of lucrative projects because the tax disincentivizes development. These people will have less money to support the economy and pay taxes.

A research paper released by the authors of Measure ULA said that the tax would not bruise the larger economy. Rather, it would only affect 4 percent of the Los Angeles housing market. The authors also contend it would create a construction boom of affordable housing, with 26,000 affordable housing units developed over the next decade. It would create 43,000 new construction jobs.