The Los Angeles mansion tax applies to any home that sells for a price above $5 million. Homes that sell for a price between $5 million and $10 million pay an additional 4% at closing, while homes that sell for more than $10 million pay an additional 5.5%.
For example, if a property is worth $5 million, the tax would result in an additional $200,000 due at closing. But if the home is worth $50 million, the tax would be an additional $2.75 million. So wealthy homeowners with multimillion-dollar properties in the Los Angeles area are now on the hook to pay a 6 or 7-figure sum whenever they transfer property.
The mansion tax also does not include the existing city and county of Los Angeles transfer tax, which applies to the transfer of all real property. The combined city and county transfer tax rate is 0.56%, making the total tax 4.56% for homes valued at $5 - $10 million and 6.06% for homes valued at $10 million and up.
The seller pays the mansion tax if the home's final sales price is above $5 million. Despite its nickname, the mansion tax applies to any type of property above that threshold, including single-family homes, condos, office buildings, skyscrapers, and more.
The mansion tax went into effect on April 1st, 2023, and applies to all property within the city of Los Angeles. The revenue generated from this new tax initiative is meant to fund city efforts to provide affordable housing and reduce housing expenses for homeless and low-income individuals.
The City of Los Angeles recognizes exemptions to the mansion tax for certain organizations and in specific circumstances. For instance, if the property is owned by a non-profit, community land trust, or limited equity housing cooperative, the mansion tax is not required, even if the sales price exceeds $5 million.
State law recognizes certain transfers as exempt from paying transfer tax, such as a gift or a name change. The City of Los Angeles also permits an exemption in certain circumstances, such as a transfer due to bankruptcy or in a partnership agreement.
Plus, there are other ways that sellers can legally avoid paying the transfer tax. The most obvious way is to keep the sales price under $5 million. This may be more difficult if the property is worth significantly more than that, but it makes sense if it's right on the cusp. For instance, if the home is worth $5.1 million, it would be cheaper to slash the price to $4.99 million than to pay a $204,000 mansion tax.
Some wealthy homeowners are also looking into subdividing their lots and selling them in separate transfers. Say you owned a property worth $12 million. If you sold it as is, you'd be hit with a $660,000 mansion tax. But if you split it into three subdivisions owned by different entities and sold them for $4 million each, it would not trigger the mansion tax. However, the legality of this strategy is still unclear. So anyone considering selling a multi-million property in LA is wise to consult a tax professional before listing their home.
The LA Mansion tax is part of an initiative to curb the rising property values in Los Angeles and make housing more affordable for average citizens. Some say it's a step in the right direction, while others claim it will stifle new development. Either way, it's here to stay for the time being, so if you plan on selling a multi-million-dollar property in Los Angeles, make sure to account for this additional tax.