Rich are already scheming ways to avoid new ‘mansion tax’ United States
Death and taxes are life’s two certainties – but not if the rich can help it.
Just weeks after Los Angeles voters backed a new measure that puts a one-time transfer tax on property sales above US$5 million (NZ$7.9 million) to generate money for affordable housing and homelessness prevention, the city’s affluent homeowners are exploring potential ways of avoiding the tax.
Known as Measure ULA – for ‘‘United to House LA’’ – the ordinance marketed as a ‘‘mansion tax’’ will impose a 4% tax on property sales above US$5m, rising to 5.5% on sales above US$10m.
So a US$5m sale would include a US$200,000 tax, and a US$10m sale would include a US$550,000 tax, which is typically paid by the seller.
It’s set to take effect on April 1 next year and it’s already causing shock waves in the LA housing market. While some analysts say high-end transactions will remain highly profitable, others fear the tax will not only drive high-end developers elsewhere, but also discourage the construction of multifamily housing that it was meant to foster.
Agents say homeowners and developers are already rushing to sell before the deadline.
‘‘For owners who were on the fence about selling, this will speed up the process,’’ said Compass agent Bret Parsons.
He said he had one client who was planning to slowly downsize and sell sometime in the next six months, but called Parsons right after the measure passed, saying he’d clean the place up immediately so they could list it in the next few weeks. The new tax would take a chunk out of his retirement fund, and he needs to sell before April.
Others are getting a bit more creative. Since the tax only affects sales above US$5m, some homeowners are looking into splitting up their properties into smaller parcels with different ownership entities so they can avoid the tax altogether.
The measure hasn’t gone into effect yet, so the legality of such a move remains unclear, and the city would likely take measures to stop such manoeuvres. But homeowners are exploring every avenue.
‘‘Rich people are very clever. They know how to manage cash, and they have time to look for loopholes,’’ Parsons said.
Another strategy might be to hatch deals off the books to keep a sale under US$5m. For example, if a seller wanted US$7m for their house, they could reach a deal with a buyer to sell it for US$4.999m, thus avoiding the tax, but then sell the furniture in the home for US$2m.
Parsons said such deals are definitely illegal, but there will be crooks who attempt it.
Jason Oppenheim of the Oppenheim Group called the tax a travesty.
He says sales will skyrocket for the next three months, but once the tax kicks in, the market will freeze. Sellers will hang on to their properties, and buyers won’t buy unless they plan to own for multiple decades.
‘‘It’s going to push developers out of LA,’’ he said.
‘‘A 4% or 5.5% tax equates to 20-30% of developer profits. So those developers will choose to develop in other luxury communities where they won’t have to pay the tax, such as Beverly Hills, West Hollywood or Newport Beach.’’
The measure may also cause some interesting wrinkles in sale prices. For example, there probably won’t be any more sales in the US$5m-US$5.2m range or the US$10m-US$10.55m range, since the seller would net less money than if they sold at US$4.999m or US $9.999m, respectively.