New Tax Cost Some Los Angeles Home Owners

Los Angeles has just implemented a new tax on some residents when they sell their homes. This new transfer tax is in addition to plain old property taxes and capital gains taxes you will owe on the appreciation of your home when you eventually sell. This tax, commonly referred to as “the mansion tax,” went into effect for a home sold after April 1, 2023.

What Is the New Mansion Tax In Los Angeles

Last November, Los Angeles voters passed Measure ULA, a transfer tax on the high-priced homes in the City of Los Angeles. The mansion tax would levy a four percent tax on property sales at or above $5 million and a 5.5 percent tax on properties that sell at or above $10 million.

Measure ULA is meant to help create a revenue stream to fund affordable housing and homelessness prevention. Initially, this tax was estimated to raise upwards of $1.1 billion for affordable housing, but that estimate has been lowered substantially to $672 million. This new real estate tax will remain in effect until a time in which Los Angeles voters choose to repeal it.

^{Who Pays The Los Angeles Mansion Tax?}

The seller must pay the mansion tax. On a $10 million home, this equates to an additional $550,000 tax on the sale of your home, regardless of whether or not you made money owning the home.

While this is often called the mansion tax, it applies to commercial and residential real estate transactions. While a $5 million home in Los Angeles is nice, crossing this price point with a commercial property is much easier.

With the median home price around $978,000 in Los Angeles, according to real estate site Redfin RDFN , this won’t affect many homeowners when they sell their homes. The Los Angeles Times has previously estimated that around four percent of Los Angeles home sales would be subject to this new tax.

Will The Mansion Tax Change With Inflation?

The only good news here is the $5 million and $10 million thresholds will be adjusted annually based on inflation. This will help the average Los Angeles homeowner avoid getting hit with this tax after a few more years of property appreciation. The new mansion tax is in addition to the existing 0.56% combined documentary transfer taxes imposed in the City and County of Los Angeles (0.11% County Documentary Transfer Tax and 0.45% City Documentary Transfer Tax). It will, therefore, represent a significant increase in the cost of real estate purchase and sale transactions in Los Angeles.

Related: 2023 Deadline For California Tax Payers

Is This Local Tax Deductible?

The tax deductions for state and local taxes (SALT) are currently capped at just $10,000 for your federal tax bill. This number is the same whether you are married or single. If you are paying a transfer tax that begins at $200,000 on a $5 million home, you likely aren’t going to get a usable tax deduction at the federal level for this expensive new mansion tax.

If you are self-employed or a business owner, there may be a workaround to expand your SALT tax deduction. We go into more depth on this topic in this post for Forbes about one California tax-planning strategy. Talk with your tax-planning financial planner and tax preparer. You should also review the other taxes you may owe on the profits made when selling your home and how to reduce the taxes owed.

This post first appeared on Forbes.com. To see the original, click here.