The Pros and Cons of LA’s New “Mansion Tax”

An Overview of the LA Mansion Tax

In the newest season of Netflix’s popular show, “Selling Sunset,” luxury real estate brokers in Los Angeles are already complaining about the newly implemented “mansion tax” on high-end properties. The tax law, effective as of April 1, 2023, imposes an additional 4% tax on homes that sell for more than $5 million and a 5.5% tax on properties over $10 million.

According to reports from the real estate industry, the new tax is likely to deter potential buyers from investing in $5 million dollar plus properties. Consequently, property sales may stagnate as sellers hold off to see if LA’s mansion tax endures in the long run.

Impacts of the Mansion Tax on the Real Estate Market

The city’s wealthy homeowners, property developers, and real estate industry leaders have publicly expressed their objections to the mansion tax. They argue that the new law would raise the tax burden on the rich and may discourage potential buyers from investing in high-end properties. The sales chill may then provoke job losses and reduce overall economic activity.

In contrast, housing advocates have lauded the mansion tax measure as a way to generate dedicated revenue to fund affordable housing and prevent homelessness. The state reports indicate that only 16% of Californians can afford to purchase a single-family home at the median price.

Despite the policy’s intended purpose to boost affordable housing, critics argue that LA’s mansion tax is likely to disincentive property developers from building multistory buildings that could boost affordable housing supply. The tax on property resale could discourage the sale of apartment buildings within ten years of construction, limiting the supply of affordable housing units.

Alternative Real Estate Taxes and Their Effectiveness

Transfer taxes, also referred to as the “mansion tax,” are a third-best among real estate taxes. Ideally, a land value tax is the best option. The tax raises revenue and encourages higher and better land use. Second to the land tax is the property tax, which incurs regular tax collections as opposed to property transfer only. However, both are politically challenging to implement in California due to the State’s Proposition 13 regulations.

Phillips, a UCLA housing researcher who inspired the policy, recommends adjusting the mansion tax measure to exempt first-time property sales to incentivize developers. Exempting first-time sales could potentially solve this limiting factor currently preventing property developers from building multistory buildings specifically designed for lower-income housing owners.

Conclusions

Despite the short-term negative impacts of the mansion tax on the high-end real estate market, property developers will continue to sell properties. The tax will raise dedicated revenue and reduce inequalities by recollecting a fair share of the wealth accumulated over the years. Altering the current mansion tax measure to exempt first-time property sales could solve the policy’s underlying issues of disincentivizing property developers from constructing multi-family buildings. The policy would then offer a reasonable way to generate resources dedicated to supporting affordable housing projects in the city.

Originally Post From https://www.businessinsider.com/selling-sunset-los-angeles-mansion-tax-millionaires-housing-crisis-2023-11