Sunday, June 18, 2023 / by Toi Holliday
How Proposition ULA (Mega Mansion Tax) Will Affect Property Owners in Los Angeles
How Proposition ULA (Mega Mansion Tax) Will Affect Property Owners in Los Angeles 
If you own a property in Los Angeles that is worth more than $5 million, you may be wondering how the recently passed Proposition ULA will affect you. Proposition ULA was a ballot initiative that was approved by voters on November 8, 2022 with 57.77% of the vote and became law January 1, 2023. It imposes a new tax on the sale or transfer of properties valued over $5 million to fund affordable housing and tenant assistance programs.
According to the initiative, the tax rate is 4% for properties sold or transferred for more than $5 million and 5.5% for properties sold or transferred for more than $10 million. The tax applies to both residential and commercial properties, and it is effective for sales or transfers effective April 1, 2023. The tax revenue will be collected in a special fund called the House LA Fund, which will be used to finance projects that address housing availability at certain income thresholds and homelessness prevention. The fund will also be overseen by a citizen's oversight committee that will develop funding guidelines, assess project needs, and audit expenditures.
Proposition ULA is expected to generate approximately $600 million to $1.1 billion annually for the House LA Fund. However, it may also have some negative impacts on the real estate market and the economy in Los Angeles.
If you are a property owner in Los Angeles who is planning to sell or transfer your property any time after April 1, 2023, you may want to consider consulting with a professional real estate attorney, tax advisor and a financial planner. According to ECJ Law, here are nine ideas to minimize the effect of Measure ULA:
1. Divided Interest. The mansion tax is a documentary transfer tax imposed on the sale of a single real property interest.
2. TIC: Two spouses (or business partners) take title to real property as tenants common (TIC).
3. Ground Lease: A real property owner might enter into a 34-year ground lease for a set sum, and then an option to purchase which is only exercisable after 10 years for an additional amount.
4. Seller Carry-Back: This strategy could involve a seller carry-back at a very high interest rate.
5. Sale of Improvements. A seller might sell furnishings, personal property, and removable improvements for one price—say $1 million—and the land for $5 million.
6. Separate Sales of Interests: Let’s say there is a segregable easement or other servitude or other non-fee interest connected with the property.
7. Split Interests: In this scenario, a seller splits the property into parts owned by different legal persons or the same person.
8. Broker’s Fee: In this strategy, the buyer (and not the seller) contracts to pay the broker’s fee associated with the sale so that the broker’s fee does not come out of the purchase price.
9. Estate Planning: The property could be transferred tax free to multiple family members or trusts.
This tax law is applicable for property in the city of Los Angeles only and not county wide. The tax will not apply to sales of property situated with the 87 other incorporated cities in Los Angeles County, including Beverly Hills, Pasadena, and Santa Monica, among others.
Measure ULA Tax Exemptions
Yes, Measure ULA does provide exemptions for the ULA Tax. The ULA Tax will be not be applicable on documents that convey real property within the City of Los Angeles if the transferee is described under newly added sections 21.9.14 and 21.9.15 of the Los Angeles Municipal Code (“LAMC”). The transferee descriptions are as follows:
Qualified Affordable Housing Organizations
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A non-profit entity within Internal Revenue Code section 501(c)(3) with a history of affordable housing development and/or affordable housing property management experience.
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A Community Land Trust, or Limited-Equity Housing Cooperative that has a history of affordable housing development and/or affordable housing property management experience.
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A limited partnership or limited liability company wherein a recognized 501(c)(3) nonprofit corporation, community land trust, or limited-equity housing cooperative is a general partner or managing member and such 501(c)(3) nonprofit corporation, community land trust, or limited-equity housing cooperative has a history of affordable housing development and/or affordable housing property management experience, or such limited partnership or limited liability company includes a partner or member, respectively, that has a history of affordable housing development and/or affordable housing property management experience.
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A community land trust or limited-equity housing cooperative partnering with an experienced non-profit organization.
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A community land trust or limited-equity housing cooperative that does not demonstrate a history of affordable housing development and / or affordable housing property management experience which records an affordability covenant, consistent with section 22.618.3(d)(1)(i).b. of the Los Angeles Administrative Code, on the property at the time of the acquisition.
Other Exemptions
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A recognized 501(c)(3) entity which received its initial IRS determination letter designation letter at least 10 years prior to the transaction and has assets of less than $1 billion.
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The United States or any agency or instrumentality thereof, any state or territory, or political subdivision thereof, or any other federal, state or local public agency or public entity.
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Any entity or agency exempt from the City's taxation power under the California or U.S. Constitutions.
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All other transactions which are exempt from the base Real Property Transfer Tax per local, state, or federal laws and regulations.
Proposition ULA is a significant change in the tax landscape for property owners in Los Angeles. It aims to address the pressing issues of housing affordability and homelessness in the city, but it also poses some challenges and costs for those who own high-value properties. If you are affected by Proposition ULA, you should be aware of its provisions and effects, and seek professional guidance if needed.
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