Los Angeles ‘Mansion Tax’ May Be Lessened Using Tenants-in-Common Structure

A recent amendment to the Los Angeles Municipal Code, Measure ULA, has greatly increased the real property transfer taxes for realty sold within the city. Properties owned and sold as tenants in common may help limit the impact of this Los Angeles “mansion tax” for certain transactions.

Background

Measure ULA, the Homelessness and Housing Solutions Tax, was approved by City of Los Angeles voters in November 2022 and amended Los Angeles Municipal Code § 21.9.2 (known as the Real Property Transfer Tax Ordinance of the City of Los Angeles). While this new tax is commonly referred to as the “mansion tax,” it applies to all real estate transfers, not just transfers of residential properties. This tax became effective on April 1, 2023 and increased the real property transfer tax on certain transactions by more than 1,000%.

Measure ULA imposes another real property transfer tax for the City of Los Angeles in addition to (and not in lieu of) the existing base real property transfer tax. Prior to April 1, 2023, the City and County of Los Angeles real property transfer tax was calculated based on the consideration or value of the real property interest conveyed at a rate of 0.56% (i.e., $5.60/$1,000 of value).

Measure ULA establishes a 4% tax on all real property sales priced or valued at $5 million to no greater than $10 million and a 5.5% tax on real property sales priced or valued at $10 million or greater. As aforementioned, this tax is levied in addition to the existing City and County of Los Angeles real property transfer taxes of 0.56%, resulting in total real property transfer tax rates of 4.56% and 6.06%, respectively.

For example, for a transfer that occurred prior to April 1, 2023 where the real estate was valued at $12 million, the transfer tax would have been $67,200. From and after April 1, 2023, the transfer tax for the same real estate conveyance is $727,200—a colossal increase of 1,082%.

As amended by Measure ULA, Los Angeles Municipal Code § 21.9.2(a) provides in part that, in addition to the 0.56% real property transfer tax, from and after April 1, 2023 there is imposed a tax

on each deed, instrument or writing by which any lands, tenements, or other realty sold within the City of Los Angeles shall be granted, assigned, transferred or otherwise conveyed to, or vested in, the purchaser or purchasers, or any other person or persons, by his or their direction, when the consideration or value of the interest or property conveyed (including the value of any lien or encumbrance remaining thereon at the time of sale) exceeds: (1) $5,000,000 but is less than $10,000,000, a tax at the rate of 4% of the consideration or value; or (2) $10,000,000 or greater, a tax at the rate of 5.5% of the consideration or value (emphasis added).

Tenants in Common

As noted above, absent a specific exemption, if a single deed is presented for recording where the consideration is $12 million, then the total real property transfer tax payable would be $727,200. However, if the property is owned by tenants in common (TICs) and one TIC presents a deed where the consideration is $4,999,999 and the other TIC presents a deed where the consideration is for the balance (i.e., $7,000,001), according to a plain reading of the Los Angeles Municipal Code, the real property transfer tax due for the first deed would be $28,000 and the real property transfer tax due for the second deed would be $319,200, for a total real property transfer tax of $347,200.

If the $12 million property were owned by three TICs and each presented a deed for $4 million, the real property transfer tax due for each deed would be only $22,400 (for a total real property transfer tax of $67,200). This is significantly less than the $727,200 in real property transfer tax owed for a single deed where the total consideration is the same (i.e., $12 million).

The TIC structure helps limit the impact of the “mansion tax,” which will be increasingly important as the value thresholds of when to apply the new mansion tax and its corresponding rates will be adjusted annually based on the Bureau of Labor Statistics Consumer Price Index.