What is ULA Tax in Real Estate?

What is ULA Tax in Real Estate?

The ULA Tax (United to House LA Tax) is a real estate transfer tax in Los Angeles, California, officially known as the “Mansion Tax.” It was passed under Measure ULA in November 2022 and took effect on April 1, 2023.

How the ULA Tax Works

• It applies to real estate transactions over $5 million within the City of Los Angeles.
• The tax is based on the gross sales price, not the net proceeds.
• The funds are intended to address homelessness and affordable housing initiatives in LA.

Tax Rates

1. 4% Tax: Applied to properties sold between $5 million and $10 million.
2. 5.5% Tax: Applied to properties sold for $10 million or more.

What Types of Properties Are Affected?

• The tax applies to both residential and commercial properties.
• It applies to sales, transfers, and certain entity ownership changes.

Key Exemptions

• Some types of affordable housing transactions.
• Certain nonprofit organizations.
• Transfers due to inheritance or divorce.

Impact of the ULA Tax on the LA Real Estate Market

Since its implementation on April 1, 2023, the United to House LA Tax (ULA Tax) has significantly influenced Los Angeles's real estate market, particularly in high-value property transactions.

Decline in High-End Property Sales

The introduction of the ULA Tax has led to a notable decrease in luxury property sales:

• Residential Properties: In the year following the tax's enactment, residential sales over $5 million dropped by nearly 70%. Specifically, 416 single-family homes and condos sold for over $5 million in the year prior to the tax, compared to only 125 in the subsequent year. ‍
• Commercial Properties: Commercial transactions experienced a similar downturn. In March 2023, just before the tax took effect, there were 73 commercial sales exceeding $10 million. This number plummeted to only three in April 2023.

Revenue Shortfall

The ULA Tax was projected to generate substantial revenue for affordable housing and homelessness initiatives. However, actual collections have fallen short:

• Initial Projections: Estimates anticipated annual revenues between $600 million and $1.1 billion.
• Actual Collections: In its first year, the tax generated approximately $215 million, about a quarter of the lower-end projections.

Market Adaptations and Legal Challenges

The real estate community has responded to the ULA Tax in various ways:

• Transaction Strategies: Some property owners expedited sales before the tax's implementation, while others have delayed transactions, hoping for potential legal reversals. ‍
• Legal Actions: The tax has faced legal challenges, notably from the Howard Jarvis Taxpayers Association. Although initial lawsuits were dismissed, appeals are ongoing, and a statewide ballot measure in November 2024 could impact the tax's future.

Comparative Market Dynamics

The ULA Tax's influence is evident when comparing markets within the Los Angeles area:

• Beverly Hills: As an independent city not subject to the ULA Tax, Beverly Hills has become more attractive to luxury buyers and developers. While high-end property sales in Los Angeles decreased by about 40% post-tax, Beverly Hills experienced a smaller decline of approximately 20%. nypost.com

In summary, the ULA Tax has led to a significant reduction in high-value property transactions in Los Angeles, resulting in lower-than-expected revenue and prompting both market adaptations and legal challenges.