The Year of the 'Luxury Tax': Hundreds of Millions of Dollars Raised, But LA's Luxury Market Suffers a Cold Snap

A year ago, Los Angeles' "mansion tax" began to take effect. It was either a godsend or an absolute disaster, depending on who you ask.

The Real Estate Transfer Tax, formally known as Measure ULA, imposes a tax of 41 TP3T on all real estate sales over $5 million and 5.51 TP3T on real estate sales over $10 million, with the proceeds used to fund affordable housing and homelessness programs.

After Los Angeles voters approved the measure in November 2022, it quickly made headlines in the Los Angeles real estate community.

Supporters say the tax provides critical funding to address L.A.'s housing crisis, and they're right. According to the Los Angeles Housing Department, Measure ULA raised about $215 million in its first year.

The Los Angeles City Council approved a $150 million expenditure plan for ULA funds in August of this year, and these funds have been used for six programs: short-term emergency rental assistance, microbe-by-microbe defense, tenant outreach and education, direct cash assistance for low-income seniors and people with disabilities, tenant protection, and affordable housing construction.

Critics, including many Los Angeles real estate professionals, claim that the tax is holding back the market - not just luxury home sales, but also multifamily developments and commercial properties - because it applies to all sales of properties over $5 million.

They are right.

When the tax first came into effect on April 1, 2023, it virtually froze the luxury real estate market in Los Angeles, with many sellers pulling their homes off the market for fear of paying hundreds of thousands of dollars more in taxes when they sold them.

Today, one year later, the real estate market is still in a state of flames and ice.

Part of the reason for the significant market slowdown is the home-buying lull across Southern California, where soaring interest rates have pushed many potential buyers away from purchasing a home altogether. But in Los Angeles - the only city affected by the property tax - sales of $5 million-plus homes plummeted twice as much as in other affluent cities, as buyers opted for homes in neighboring areas not affected by the tax.

From April 2022 through March 2023, the year before the ULA was implemented, there were 366 single-family homes in Los Angeles that sold for $5 million or more. In the following 12 months, there were only 166, a drop of about 68%.

Luxury home sales have also slowed in nearby cities, but not at the same rate, according to the Multiple Listing Service.

In Beverly Hills, sales of single family homes fell by 24%.

In Santa Monica, single-family home sales were down 29%.

In Malibu, single-family home sales declined by 28%.

"My clients are leaving Los Angeles," said Jason Oppenheim, a luxury real estate broker who is the reality real estate show "Selling Sunset Selling Sunset." We can't continue to drive the rich out of our cities."

Oppenheim and his team spent much of the show's seventh season publicly opposing the tax, which they claimed was crowding potential buyers out of Los Angeles and into other affluent areas.

"The tax has not lived up to its promise, and it's time for everyone to let go of their egos and realize that it's a mistake," Oppenheim said.

There are several different reasons for the drop in housing prices. Last spring, many luxury homeowners began selling their properties before the property tax came into effect, including celebrities such as Marvon Wahlberg and Brad Pitt.

Others take advantage of loopholes to avoid paying taxes, such as splitting a property into multiple parts and selling them separately to stay under $5 million.

As a result, the ULA Bill has raised far less money than initially anticipated.

Early supporters of the ULA bill estimated that the tax would raise about $900 million a year. Last March, a report from the Office of the City Manager revised that figure downward to $672 million.

The current total gross receipts of $215 million fall far short of initial projections, but Greg Good, senior consultant for policy and external affairs at the Los Angeles Housing Department, said he expects higher gross receipts in the future.

In the first three months of the ULA measure, the tax raised $15 million, or just $5 million per month. But from July 2023 through February 2024, the tax raised about $200 million, or $25 million per month. The city's fiscal year, which begins July 1 and ends June 30, is expected to reach about $300 million.

"As much as there are lawsuits, as much as the market is cold, and as much as the wealth-protection industry is designed to help the wealthy protect their money from taxation, there is still $300 million in funding for housing and homelessness programs," Goode said.

To date, the City has spent approximately $28 million on assistance to struggling tenants and landlords, $23 million on micro eviction protection and tenant outreach, and $56.8 million on loans to expedite the development of affordable multifamily housing projects.

"None of this could be done without ULA," Goode said.

Throughout the November 2022 ballot, the real estate community in Los Angeles has fought this tax tooth and nail, campaigning against the measure and trying to find ways to translate it after it passed.

In October, a Los Angeles County judge dismissed the latest challenge-a lawsuit claiming the tax was unconstitutional-but the plaintiffs are appealing the judgment.

The next hurdle the measure will face is in November, when Californians will vote on a statewide ballot initiative called the Taxpayer Protection Act. If passed, the bill would require the special tax to be approved by two-thirds of the vote, rather than a simple majority, for all measures passed after January 1, 2022. Since Measure ULA passed in 2023 but was only approved by 57%, it may need to be voted on again or may be repealed.

Gov. Gavin Newsom filed an emergency petition to remove the proposition from the ballot, but the status of the petition is unclear.

"This is a David versus Goliath story. The moneyed interests are trying to prevent Angelenos from solving this existential crisis, but I believe the voters will turn the script at the polls and turn it around," Goode said." We will respond to the housing crisis with as much passion and energy as we need to," Goode said.

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This article originally appeared in the Los Angeles Times.