Beginning April 1, 2023, Measure ULA, a citizen-sponsored ballot initiative which was approved by voters in the City of Los Angeles, adds a new tax on the sale or transfer of real property valued at over $5 million. This Measure amends the City’s law to add a new tax to property sales to fund affordable housing and tenant assistance programs and is a permanent tax until repealed by voters.
While the City collects an existing 0.45% documentary transfer tax (DTT) on property sales and transfers, the new ordinance imposes an additional tax (the ULA Tax) as follows (and adjusted annually based on the Bureau of Labor Statistics Chained Consumer Price Index):
- A 4% tax on real property sales or transfers valued at over $5 million but less than $10 million (or total combined Applicable Tax Rate of 4.45%); and
- A 5.5% tax on real property sales or transfers valued at $10 million or more (or total combined Applicable Tax Rate of 5.95%).
Notably, the ULA tax applies to a property’s entire value, rather than an amount in excess of the $5 million and $10 million thresholds. Furthermore, unlike the existing DTT, the property value thresholds under the ULA Tax include the value of any liens or encumbrances remaining on the property after the sale or transfer. In other words, the ULA Tax is calculated on the property’s full value rather than its net equity value, even if the property is transferred subject to any existing indebtedness. In addition, the ULA Tax applies regardless of whether the property is sold at a gain or a loss.
As an example, prior to Measure ULA, a sale of property valued at $6 million would be subject to a $27,000 DTT (calculated as $6 million value x 0.45%). Under the City’s new law, the sale would be subject to a total transfer tax of $267,000 due at closing, calculated as follows: Applicable Tax Rate of 4.45% x $6 million.
As another example, a sale of property valued at $40 million, with the buyer assuming a $30 million mortgage remaining after the sale, would be subject to a $45,000 DTT prior to Measure ULA. Under the new law, this sale would be subject to a total transfer tax of $2,380,000 due at closing, calculated as follows: Applicable Tax Rate of 5.95% x $40 million.
The ULA Tax is estimated to generate $600 million to $1.1 billion annually. At least 92% of the revenue collected from the tax would fund affordable housing under the Affordable Housing Program and tenant assistance programs under the Homeless Prevention Program, and up to the remaining 8% would fund program administration, reporting, compliance, and implementation.
Recently, other California cities, including the cities of Santa Monica, Culver City, and San Francisco, have passed similar laws either to impose new transfer taxes or increase existing tax rates. For example, the City of Santa Monica previously imposed a transfer tax of 0.3% for property sales and transfers valued at less than $5 million, and a tax of 0.6% for transfers valued at $5 million or more. Beginning March 1, 2023, Santa Monica has a new tax rate tier of 5.6% for transfers of properties valued at $8 million or more. Unlike the ULA Tax imposed by Los Angeles, however, Santa Monica’s transfer tax is calculated based on property values exclusive of the value of any lien or encumbrance remaining on the property after the property’s sale or transfer.
For example, prior to March 1, 2023, a sale of property valued at $11 million with a $1 million mortgage remaining on the property after the sale would be subject to a $60,000 transfer tax, calculated as ($11 million value – $1 million debt) x 0.6%. Under Santa Monica’s new law taking effect beginning March 1, 2023, the sale would be subject to a higher tax rate tier and the transfer tax would significantly increase, to $560,000, calculated as ($11 million value – $1 million debt) x 5.6%.
Certain exemptions from the tax imposed by Measure ULA apply, including exemptions for transfers to non-profit entities, certain community land trust and limited-equity housing cooperatives, or any federal, state, or local government entities. In addition, Measure ULA amends the City’s Municipal Code to authorize the Director of Finance to issue any rules and regulations reasonably necessary to enforce and administer this tax, including to further define the term “realty sold,” as the term is used to define the ULA Tax.
While the City of Los Angeles released updated FAQs in March 2023, many questions remain open until the Director issues further clarifying rules and regulations. For example:
- Will the current list of exemptions from the City’s existing documentary transfer tax also apply to the ULA Tax?
- Are there other additional exemptions that may apply to the ULA Tax?
- How will the tax be applied if only a partial interest in a property is transferred, or if partial interests are transferred in separate sales?
- What if the interest that is being transferred is below the $5 million threshold while the property is above the $5 million threshold?
- How will the tax be applied if the same property is transferred more than once (e.g. a transfer from a trust to an individual, then from that individual into another trust)?
As more cities in California follow this growing trend of increasing transfer taxes, please reach out to our Los Angeles Tax Law attorneys with any questions.