- In the new season of “Selling Sunset,” there’s even more drama surrounding expensive homes.
- This time, it comes down to Los Angeles’ new real estate tax, which affects homes sold for more than $5 million.
- The tax is designed to fund affordable housing, but it may be imperfect.
Less than 10 minutes into the new season of the hit Netflix reality show “Selling Sunset,” two luxury real estate brokers are already complaining about a new tax on Los Angeles’ wealthiest home buyers.
“It’s going to be a nightmare for us,” says veteran real estate agent Mary Fitzgerald. “We’re just screwed.”
The city’s so-called “mansion tax” was about to go into effect when the show was filming its final season — and the high-end real estate sector was booming. The owner of a 13,000-square-foot home worth $26 million that agents were trying to sell would have to pay an additional $1.43 million in taxes under the new law. The policy, which took effect April 1, 2023, levies an additional 4% tax on homes sold for more than $5 million and a 5.5% tax on those for more than $10 million. Selling Sunset agents were terrified their business would dry up as homeowners were scared off by the new tax, in addition to high interest rates.
“Those are huge numbers and I think it’s a huge detriment to the real estate market as a whole,” one of the agents, Nicole Young, said on camera.
The boss of brokerage firm Oppenheim Group, Jason Oppenheim, reportedly told customers in an email that the new tax “defies common sense and basic logic.”
It’s not often that a tax measure becomes the vehicle for a reality TV show. But the pervasiveness of the Los Angeles real estate tax is felt throughout the seventh season of the soapy real estate reality series, as agents are scrambling to sell before implementation, or have difficult conversations with their customers. And Oppenheim Brokers – best known for marketing obscenely flashy homes while doing the same showy clothing choice – are not alone.
Los Angeles’ new tax was designed to raise dedicated revenue for affordable housing and homelessness prevention, but some advocates might agree with “Selling Sunset” operatives that the law is flawed – But not for the same reasons.
While high-end real estate agents worry about their sales, some housing advocates welcome the new tax. Only 16% of Californians can afford to purchase a single-family home at the statewide median price of more than $840,000, according to a statewide housing affordability report. California Association of Realtors. In Los Angeles, a minimum income of $198,000 would be required to make this feasible.
“The affordable housing crisis is really getting worse in every part of the country,” Mari Castaldi, director of national housing policy at the nonprofit Center on Budget and Policy Priorities, told Insider. She added of the city’s property tax: “It’s a very reasonable and fair way to generate resources that can meet these needs.”
But even some of the law’s biggest supporters say it has a major flaw. Critics say the tax will likely deter multifamily development — the very construction that would boost the supply of affordable housing.
Unintended consequences of a tax on real estate properties
Colloquially known as the mansion tax, United to House LA (Measure ULA) passed in November 2022 with 58% support.
The Los Angeles law is the subject of a host of well-heeled and vocal critics. Real estate interest groups and others filed two lawsuits over the policy, but both were dismissed. The court rulings will likely be appealed and critics of the law are considering other ways to undermine it. But for now, the tax is in effect and expected to raise about $150 million this year.
Los Angeles isn’t the only city banking on high-end home sales to boost its public housing efforts. New York and Washington both impose statewide taxes on real estate properties, while the governor of Massachusetts just gave his blessing to municipalities that want to implement a transfer tax on high-value properties . The Chicago City Council also recently put forward a proposal to increase taxes on homes sold for more than $1 million. More recently, Santa Fe voted for an additional 3% tax that buyers will pay more than $1 million for homes to raise money for the city’s affordable housing programs.
In Los Angeles, Mayor Karen Bass and the City Council have already determined what this year’s tax revenue will be used for. The largest share – $56.8 million – will be dedicated to affordable housing projects. An additional $30.4 million will fund short-term assistance for renters and small landlords. And $23 million will go toward representing people facing eviction, according to the LA Times. reported.
Shane Phillips, a UCLA housing researcher whose work helped inspire Los Angeles’ mansion tax, worries that the mansion tax depresses new development, particularly multifamily buildings.
He pushed for the policy to exempt first sales within 10 years of construction so that the tax would not deter developers, who often sell apartment buildings shortly after construction is completed.
In Los Angeles, at least 10 percent of housing in multifamily buildings is for low-income residents, meaning that if a number of new apartment buildings aren’t built because of the tax, the city could end up by losing a certain number of affordable housing units. units that are extremely expensive for the government to build or subsidize.
“We’re taxing these new buildings and the new buildings are going to be maybe 5 or 10 percent of the total revenue, maybe $100 million at the most, but we could lose a bunch of privately built units below the price “We have over $100 million to subsidize,” Phillips said. “So it’s like, what are we doing here?”
Phillips said transfer taxes are the “third best real estate-related tax.” The best form is a land value tax, he argued, because it generates revenue and encourages the widest and best use of a parcel of land.
The second most effective are property taxes, he explained, because they can be collected regularly, not just when a property changes hands. But both of these are politically tricky in California, where property taxes are massively limited by the state government. Proposition 13.
Transfer taxes on expensive real estate sales serve an admirable purpose: to redistribute some of the wealth that the real estate industry and homeowners have collected as home values have soared in recent years. And, when designed effectively, they can have a minimal deterrent effect on the market, while still raising significant funds.
“A lot of money has been made and, to some extent, trying to recoup a small part of it is a very reasonable goal, especially if that money is then spent to help people who have been harmed by the price rise” , Phillips said. said.
In the months leading up to April 1, “Selling Sunset” agents weren’t the only ones scrambling. Sellers in Los Angeles did everything they could to sell their properties before the deadline. Billy Roseco-founder of luxury real estate company The Agency, told Insider.
“When you look at the numbers, you’ll definitely see a spike in activity that occurred in the 30, 60, 90 days leading up to April 1,” Rose said. And there were “car deals, big commissions and various incentives to try to close a sale” before implementation, he said, although he doesn’t personally know of any situations in which that was done. is actually produced.
Rose said the new tax, coupled with high interest rates, is contributing to the stagnant market: “We just have fewer and fewer properties available for sale. »
This deterrent effect is probably temporary. Castaldi said the impact so far has been skewed by sellers delaying putting their properties on the market to see if ongoing legal challenges would allow the tax to be overturned.
Phillips isn’t worried about a near-term freeze in the high-end real estate market. For the most part, he believes that owners who want to sell their properties will eventually do so and that the pace of transactions will return to normal within a year or so.
Rose said he “can understand why there are people who are in favor of the idea of taxing multimillionaires,” but that the tax “isn’t really going to please those rich people.” Instead, he said, it could fall on people struggling with inflation and trying to buy a home, especially with less construction underway.
If the city finds that the property tax discourages development and reduces the supply of affordable and market-rate housing, the City Council could revise the law. Phillips argued that if the law is changed to exempt first-time sales, the real estate tax “unquestionably will do more good than harm.”
“Any tax has negative consequences,” Phillips said. “There’s one specific negative consequence that we really need to address, but other than that, the consequences of a tax like this are pretty limited. And having $700 million, a billion dollars a year to spend on the affordable housing, rental assistance, and of course, -a lawyer and things like that, it’s going to do a lot of good.”
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