Since April 1, 2023, the so-called mansion tax has been applied to every non-exempt real estate sale of $5 million or more in Los Angeles.
This initiative has raised around $439 million for city housing projects (as of October 31, 2024), but it has dramatically affected the local real estate market.
If you’re a Gatsby Investor (or you’re thinking about investing with us here at Gatsby), you may be wondering how LA’s mansion tax affected Gatsby. This post will explain how the mansion tax has affected our market, and what Gatsby is doing to help our investors make the most of today’s mansion-tax market.
What is the Mansion Tax?
The mansion tax, officially called Measure ULA, is an extra transfer tax on high-value real estate in the city of Los Angeles. This tax is charged to the sellers. However, sellers might increase the sales price in an effort to share the cost burden with the buyer.
When the voter-approved measure was launched on April 1, 2023, it applied to properties with a $5 million+ sales price, but this threshold is adjusted every year based on the Consumer Price Index.
- Properties with a sales price below $5,150,000 = no additional tax
- Properties with a sales price between $5,150,000 and $10,299,999 = 4% additional tax
- Properties with a sales price of $10,300,000 or more = 5.5% additional tax
The while mansion-tax moniker makes it sound like this only applies to residential estates, it actually applies to all types of real estate: residential, commercial, industrial, and even vacant land.
Mansion Tax Exemptions
A property is exempt from the mansion tax if the transferee (buyer) is a qualified affordable housing organization, a qualified 501(c)(3) entity, or a government entity or agency.
Note: Even if the seller is a qualified affordable housing organization, it is not exempt from the tax if the buyer is not an exempt entity.
How is the Mansion Tax Affecting the Los Angeles Real Estate Market?
The long-term effects on property values and market dynamics are still unfolding, but so far, we’ve seen:
- A rush of sales over $5 million just before the tax was implemented in Q1, 2023.
- A slow-down in sales over $5 million since then, as the tax discourages property owners from selling.
Proponents of the measure claimed it would generate between $600 million and $1.1 billion per year to help the city fund housing initiatives. But so far, the actual income has been 27-60% short of expectations.
How Did the Mansion Tax Affect Gatsby Investment?
Prior to 2023, Gatsby had had success with luxury home developments. We would build one-of-a-kind estates in the most prestigious neighborhoods in LA, and sell to high-net-worth individuals with discriminating tastes.
The mansion tax dramatically slashed profit margins on this type of investment. Because we stay current on changing market conditions and real estate regulations, we were able to pivot out of luxury homes before the tax took effect.
Our goal is always to maximize the return potential for our investors. So we shifted to projects that offer better returns: single-family house flips and small multi-family developments.
Single-Family House Flips
Single-family house flips offer short terms, low minimum investment amounts, and impressive value-add potential. We focus on lots that are large enough to accommodate an ADU (accessory dwelling unit), which allows us to create two living units on a single-family lot.
Newly-renovated homes with ADUs are in extremely high demand because they are turn-key for the new buyer, and offer a separate residence to be used as a guest house, multi-generational living space, or even an income-generating rental property.
We specifically select mid-range properties that will sell below the mansion tax threshold, saving our investors from this profit-reducing tax.
Small Multi-Family Developments
Multi-family developments are in high demand and offer potential for above-average yields. We focus on lots that are large enough and zoned correctly to accommodate a 4-10-unit structure. These smaller multi-family buildings are easier to get permitted, faster to build, and in greater demand by investor-buyers.
These developments are built to sell and can be completed in as little as 18-24 months. By keeping the number of units low, we can keep the sales price below the mansion tax threshold to avoid the extra tax.
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