Measure ULA can cost you $200,000+ on a single sale, and the popular LLC loophole almost certainly won’t save you.
Stephen Morris breaks down exactly how LA’s mansion tax works in 2024, why selling the LLC instead of the property is risky and likely ineffective, and how to actually model this cost before you buy or sell. 📊
[00:00] What Measure ULA is and the 4% tax rate
[00:43] How the mechanics work and current threshold
[01:30] The hard cliff at $5,400,000
[02:14] Repeal attempts and Proposition 43 fallout
[03:04] Why ULA is here to stay
[03:42] The LLC sale myth
[04:01] Why the LLC workaround gets you audited
[04:22] Modeling the 4% exit cost on a 5-year horizon (and the 5.5% tier above $10M)
[04:52] Tip: separating personal property in escrow
[05:40] Why this tax policy misses the bigger picture
[06:13] Final takeaway
Real estate investors, brokers, and CPAs planning a sale near or above the $5.4M threshold need to understand these rules before they underwrite a deal. This video covers the updated $5,400,000 and $10,000,000 thresholds, the jump to 5.5% above $10M, and why the LLC transfer workaround circulating on social media won’t hold up under audit. 🏢
Full Video Transcript
[00:00] Welcome everyone. Stephen Morris here with Advise RE. And today, we had to talk about this particular subject, and you guessed it, Measure ULA, also known as the mansion tax, which is a tax of all real estate sales over $5,400,000 at a rate of 4%. And so you’re talking about well over $200,000 tax bill even if you sell the property at a loss. Oh, and by the way, it doesn’t only include mansions, it includes all types of properties outside of mansions, multifamily, shopping centers, office buildings, hotel, literally every type of property transfer that is sold for over $5,400,000 is going to be subject to a 4% tax on the top, on the sales price.
[00:43] Let’s dive into some of the mechanics and how this works out and what are some of the news that may be bad for some property owners that own property over $5,000,000, and also just some tips and tricks on how to model this particular cost if you’re selling property or you’re buying property in the city of Los Angeles. Measure ULA was passed in tax year 2022, and it applies, like I said, to all real estate transfers, not just mansions, of over amount of, back then, $5,000,000. Just in July, they increased the limitation or the threshold for this transfer tax to happen at $5,400,000. Now I wanna be very clear. If you sell a property at $5,399,000, the 4% tax would be not applicable.
[01:30] It’d be zero. However, if you sell it for $5,400,000 or any amount over that, then you’re talking about this additional 4% tax, which is catastrophic and absolutely a huge detriment to the city in providing more housing, and there’s actually been a noticeable shift in the decrease in construction of multifamily projects and other affordable housing projects in Los Angeles versus the surrounding areas. And now bear in mind, LA County has a lot more cities than just City of Los Angeles. As I recall, there’s roughly around 88 cities in the county of Los Angeles, and those cities mostly haven’t been as affected as the City of Los Angeles has been. Of course, there are other cities within the county of Los Angeles that have similar types transfer taxes, Santa Monica being one of the most noteworthy ones.
[02:14] Recently, we’ve been very excited over the fact that this city tax might be repealed, and there was some talk in city council about potentially scaling back the transfer tax at least on new multifamily construction that’s been built maybe over that fifteen year period. The transfer tax won’t apply. However, that went away. And then more recently, Proposition 43 came into place to repeal or reduce substantially any sort of transfer tax in in any city in California. However, after sort of a behind the scenes deal between the Jarvis Taxpayers Association and the government of California, they decided to drop this particular proposition in exchange for a new law that’s gonna be on the ballot this November in California, which would require any tax increase at the local level to require a two thirds majority vote.
[03:04] What does that mean for ULA? Unfortunately, unless the city of Los Angeles decides to repeal it, ULA is here to stay. And that’s a big problem, and it’s something we strongly have to kind of live with here in the city of Los Angeles as we continue to have further headwinds in construction costs, further regulations, and further rules. So unfortunately, ULA is here to stay, and it’s not going anywhere anytime soon. One myth I want to address right now, which is something I think that’s been circulating around the Internet, especially in Instagram and all that good stuff, is that you can avoid ULA altogether by instead of selling the property, you can sell the LLC.
[03:42] And so instead of going into escrow and buying someone’s property, you’re buying the LLC which owns the property. Now I gotta tell you that particular strategy is not gonna work. There are a lot of rules and regulations around it. Please consult legal counsel before considering such a transaction. However, what we’ve seen is that particular exception will not apply.
[04:01] It will get you in trouble if you’re audited, especially since the city is very desperate for funds as LA County. It seems to year after year have budget problems. So what do you do to manage this particular outcome? Well, there’s a few things you’ve got to consider. First is, anytime you’re about to develop a property or you’re gonna acquire property over this threshold, you’ve got to model in that 4% exit cost.
[04:22] So assume that, you know, typical real estate pro formas are a five year horizon where you buy in year zero and then you hold it for five years and dispose of some sort of assumption. Automatically assume that in addition to your transaction cost, brokerage fees, escrow, and title, you’ve got an additional 4% layer. By the way, should mention that once you start getting over $10,000,000, that 4% increases to five and a half percent. So it gets really, really expensive as you start to move up the ladder in terms of property value. Few little tips and tricks.
[04:52] This tax only applies to real property. Therefore, if you’re in the business of, for example, selling a hotel, the furniture and fixtures and all the other assets that aren’t considered to be real property could actually be conveyed separately in escrow, and that might possibly bring you down the threshold. Again, it’s a hard cliff. $1 below the threshold, you’re not subject to the tax. $1 above the threshold or at the threshold, you are absolutely subject to the tax.
[05:17] So these are a couple little tips and tricks here on how to get around it. Unfortunately, the LLC transfer that we talked about before is just simply not gonna be a way out of it. So with that in mind, we’ll keep you posted if there’s any further developments in terms of the transfer tax possibly getting repealed in the city of Los Angeles. I really hope it does, not because I don’t think that the city of Los Angeles needs money. It absolutely does.
[05:40] However, in my opinion, it’s a poorly thought out law because while they can happily point to the $400,000,000 or so that they’re earning per year in transfer taxes, they’re missing the point that with lower construction and lower development in the city of Los Angeles, they’re missing out on property taxes. See, new construction generates a higher property tax base, which the city can generate year over year. When we’re talking about a transfer tax, they’re getting that one time once in a while. And so, you know, they might be pointing to and saying, yeah, we got the $400,000,000. That’s a victory for us.
[06:13] And it goes to show you that this type of tax policy was good, but you’ve gotta figure out what you’re missing on the other end. And the property taxes are an absolute miss, and hopefully, in the near future, the city of Los Angeles will consider repealing this law and putting something that just makes a lot more sense towards being pro housing, pro development, and more importantly would be pro economic growth. Thanks so much for watching, and we hope to see you in our next video. And we’ll keep you up to speed if we hear anything new about the city of Los Angeles and the repeal of ULA.