Beginning this past weekend, high-end homes in one of the nation’s most high-end markets are now subject to what is colloquially referred to as a “mansion tax.” Following the example of some other exclusive markets and big metros, the city of Los Angeles passed Measure ULA back in November, levying a significant fee on transfers of real property that sell for over $5 million. Uniquely, revenue from the tax will fund affordable housing and services to combat homelessness in the city.
On the surface, it is hard to see the downside. Asking multi-millionaires to shoulder a 4% – 5.5% one-time transfer tax to help address the acute problem of homelessness and low-income housing shortages in LA, the city estimated it could generate up to $1.1 billion a year. So far, media coverage has mostly focused on the over-the-top incentives luxury sellers offered in recent weeks in an attempt to beat the clock—promising everything from a new Bentley to millions in credit if buyers closed before April 1.
But assuming the measure survives legal challenges and a potential repeal referendum, what are the medium- and long-term effects on real estate, and the larger economics of the city? And how likely is it that other regions will consider similar measures?
Anthony Marguleas is a luxury broker based in Pacific Palisades, founder of Amalfi Estates. He has sold over $2 billion worth of homes in the LA market, and is not a fan of the mansion tax, having spent significant time and research pushing back against the arguments of Measure ULA’s proponents.
“They actually naively wrote that this will have zero effect on the economy,” Marguleas says. “The city is actually going to lose millions of dollars in revenue they normally would have received because of this—to think that you can just take a billion dollars out of people’s pockets, and there’s not going to be repercussions…”
Christophe Choo, another luxury broker with 23 years of experience, currently affiliated with Coldwell Banker Beverly Hills, calls himself a “realist” when it comes to the mansion tax. While he says he thinks the measure is “a big mistake,” the potential for damage to the real estate market is somewhat unknown.
“The wealthy buyers, they want to save money as much as anyone else, but they still want what they want,” he says. “Bottom line is, everybody wants a deal.”
A white paper published by the UCLA Lewis Center for Regional Policy Studies provided fodder for proponents of the measure, which was originally proposed by a coalition of housing advocacy organizations. The writers of this paper pointed out that only 24% of LA residents can afford to purchase a median-priced home, compared to 47% nationwide, as well as highlighting the 66,000-plus homeless people living in a county that is home to some of the world’s most extravagantly wealthy.
Marguleas does not dispute the housing crisis is real. In fact, he donates 10% of his team’s commission to a handful of charities, including at least one that directly serves homeless populations. But like many others in the real estate industry, he warns that the effects of a major tax like this will be much further reaching than advocates have claimed.
“It’s going to be a trickle down effect—this one initiative just devalued properties by billions and billions of dollars,” Marguleas claims.
What will happen, he says, is that sellers at roughly that $5.25 million to $5.5 million price range will lower their sales price to just under $5 million to avoid the tax. That means comps at that price point will not match—homes actually worth $5 million, with less amenities or less valuable locations, will have to drop their price to compete, which will devalue the next price point all the way down the line.
Additionally, developers will begin pulling out, at least initially, leaving empty land and shedding local jobs. Marguleas says he has already heard of a significant number of developers completely pivoting from the city to nearby regions, which affects everyone from the architects to the day laborers.
“A majority of the development in the single family is typically a small business owner, building three or four homes a year,” he claims.
Choo says he can also see this happening to a limited degree, but is not anticipating any kind of mass exodus or pullback.
“I’m sure there will always be a certain number (of builders) that will be affected, and they will make a decision accordingly,” he explains. “It’s a little too early to really determine exactly how it’s going to affect the marketplace.”
There is little worry about buyers avoiding the regions or price points that will be affected by the tax, Choo claims. Most are planning on keeping the homes for years, at which point the tax is hopefully only a small fraction of the appreciated value of the home.
“Especially in the luxury market, buyers are going to buy. It’s a discretionary market,” he says. “It’s unique, it’s special—the buyer needs a place in LA.”
The white paper argues that the number of single-family spec-built units selling at $5 million or more is too small to affect overall development investment, while admitting that some “moderate density” multifamily projects could be at risk.
City on a hill
The mansion tax is hardly just a Los Angeles issue. New York City added a special tax rate on multi-million dollar property sales in 2019, and San Francisco also has a progressive tax rate that increases significantly at the highest levels. But both these cities have several tiers, compared to Measure ULA, which offers two sharp cut-off points—at $5 and $10 million.
Several states, including Connecticut, Hawaii and Washington—also utilize some form of progressive transfer tax, though none approach the 5.5% ceiling of Measure ULA.
Currently, Los Angeles is in a down market, which Marguleas highlights as especially bad timing, as the tax is not based on appreciation—even a seller who overpaid for a home still has to pay the full tax. In the short term, some sellers are choosing to “roll the dice” not to put their homes on the market, according to Marguleas, hoping that the tax might be repealed.
“The issue is, property values are depreciating. The question then begs, if the home is going to depreciate more than 4% or 5%, you just lost any benefit you would have had,” he points out.
Theoretically, this makes short-term investment in luxury real estate inherently riskier—something the authors of the white paper acknowledged, but framed as a positive, citing the negative effects of so-called “home flipping” on eviction rates and vacancies.
“If a side effect of this tax plan is to discourage flipping and speculation, that is a bonus,” they wrote.
With transactions down significantly across the board in California, Marguleas says from a purely real estate perspective, a tax that depresses activity is unwelcome (although only a few hundred homes are affected right now).
Marguleas also says the specific two-tier structure is flawed, with loopholes that allow sellers to skirt it while muddling pricing and real estate values. Buyers could pay commission and closing costs outside of escrow, or furniture could suddenly be valued at $300,000.
“Common sense says they’re going to do this,” he says.
Data in the near future is going to show how many properties are going to sell in those specific price points right below the thresholds, creating artificial clustering, with Marguleas saying he expects those numbers to be “shocking.”
Currently, people are trying to find even more complex loopholes. While emphasizing that he cannot and does not give legal advice, Marguleas says lawyers have spoken to brokers about a legal scenario called “tenants in common,” which he says can let a buyer and seller essentially turn a $9 million sale into two $4.5 million transactions—thus avoiding the mansion tax.
“We can’t give advice on what people should do or not,” he emphasizes.
Choo says he heard at least one of the law firms that is suing to overturn the tax is offering to essentially hold onto the tax money paid by sellers, promising to return it if the repeal is successful.
As policymakers around the country have sought to address housing shortages and wealth inequality, it seems likely that more of these “mansion taxes” could pop up. Progressive nonprofit Center for Budget and Policy Priorities wrote in 2019 that these mansion taxes could address many of these underlying issues, and laid out a variety of potential structures—including targeting only second homes, or basing the tax on the highest share of property values, rather than a flat amount.
Marguleas says he doesn’t believe that the markets will easily adapt to the tax in LA, if it survives challenges, and doubts the benefits will be what advocates claim (the city recently downgraded revenue estimates for the tax by about 25%, citing a cooling market).
Choo is somewhat more optimistic, saying that he will continue to educate clients and potentially help lobby for an appeal (once there is a ballot measure), but acknowledging that markets adapt to all sorts of new costs.
“Things are what they are—like interest rates and property taxes. It’s unfortunately the cost of buying a property in LA,” he says.
