In early 2023, the luxury real estate market in Los Angeles experienced a significant boom as buyers rushed to close deals before the implementation of Measure ULA, also known as the “mansion tax,” on April 1. This new measure added a transfer tax of 4 percent for home sales above $5 million and 5.5 percent for sales above $10 million. The anticipation of these additional taxes drove a 35 percent increase in the number of homes sold for $5 million or more in the first quarter of the year. The neighborhoods of Brentwood, Pacific Palisades, and Hancock Park were particularly active during this period, with notable celebrities like Brad Pitt and Mark Wahlberg selling their properties for millions.
However, after April 1, the market experienced a noticeable slowdown as potential sellers became wary of listing their homes. The additional tax burden on high-end properties deterred sellers, leading to a pause in the market for homes priced over $5 million. Real estate attorney Loretta Thompson noted that this cooling effect was expected but still quantifiably significant.
Luxury real estate agents, who were largely opposed to Measure ULA, continue to voice their opposition to the tax. Douglas Elliman’s John Iglar argues that the tax is ill-conceived, as it unfairly punishes sellers who are responsible for reporting and paying the tax. In Los Angeles, sellers bear the burden of the mansion tax, unlike in New York where buyers are responsible. Iglar believes this approach unfairly targets sellers, including those who might be cash poor despite owning a high-value property.
As a result of these concerns and uncertainties, potential sellers are more cautious about listing their homes. The decision to sell now requires a compelling reason beyond a simple desire for a change of pace. Real estate agent Michael Nourmand emphasizes the need for a clear motivation to sell in a market affected by the mansion tax.
Iglar predicts that the downward trend in sales will continue, suggesting that the high-end market will remain relatively dormant for the rest of 2023. Commercial real estate has also been significantly impacted by the tax, and this trend is expected to persist, according to Chris McKenzie of Lee and Associates, a commercial real estate firm.
However, there are some winners in this scenario. Independent Los Angeles County cities like Beverly Hills and Malibu have become more desirable since the mansion tax does not apply to them. This exemption has shifted the balance of power in luxury real estate, which has long been a seller’s market. Buyers now have the upper hand, waiting for sellers to reduce prices on mansions. James Corden’s recent sale of a Brentwood house exemplifies this shift, as he initially listed it for $22 million, dropped the price to $18 million, and eventually sold it for $17.1 million. According to Dirt.com, the sale is subject to nearly $1 million in taxes under the Measure ULA.
Despite the challenges it poses to the market, many hope that the mansion tax will be revamped or rescinded altogether. Currently, two lawsuits are already challenging the measure, and the City of Los Angeles finance director has been instructed to hold any monies received from the tax instead of using them to create affordable housing options in the city.
Overall, experts remain optimistic about the future of Los Angeles real estate, believing that the market will eventually adjust to the new tax. The appeal of neighborhoods like Bel Air and Holmby Hills is expected to endure, attracting buyers despite the additional tax burden.
In conclusion, the implementation of Measure ULA, or the mansion tax, has had a significant impact on Los Angeles’ luxury real estate market. While there was a surge in sales before the tax came into effect, the market has since slowed down, with potential sellers hesitant to list their homes. Real estate agents and industry experts have criticized the tax for its unfair burden on sellers and its impact on the high-end market. However, independent cities like Beverly Hills and Malibu have seen increased desirability as buyers seek alternatives to avoid the tax. The future of the mansion tax remains uncertain, with hopes for possible revisions or rescinding. Nonetheless, despite the current challenges, the allure of prestigious neighborhoods in Los Angeles is expected to persist.