LA's Ultra-Wealthy Residents Resort To Shell Game To Skirt City Mansion Tax (2024)

Some of Los Angeles's most wealthy residents have come up with a novel way to skirt the city's controversial mansion tax, and it's not clear whether there is any way to stop them from doing it. In 2022, Los Angeles voted in favor of a mansion tax to be levied on property owners who sold the most expensive, luxury properties in the city. The revenue from the tax was earmarked for public housing initiatives and social services.

How Does The LA Mansion Tax Work

Like many cities, Los Angeles charges a tax on conveyances of real estate within city limits. The base tax rate for conveyances in Los Angeles is $2.25 for every $500 of the sale price. However, Los Angeles voted for a tax called Measure United to House LA (ULA), to raise additional money to combat the city's homelessness crisis.

Measure ULA quickly became known as the mansion tax because it imposed a 4% tax on properties that sell for between $5 million and $10 million and a 5.5% tax on properties that sell for more than $10 million. This mansion tax would be applied in addition to the base rate of $2.25 per $500. On the surface, it seemed like a perfect idea.

It would allow Los Angeles to raise badly needed funds to help remedy a pressing issue and only apply to a minuscule percentage of the city's real estate transactions. Although Measure ULA does not apply to most Angelenos, like any tax, it is much less popular with the people who have to pay it than it is with people who don't.

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First, They Sold Early To Beat The Tax

If death and taxes are the only two guarantees in life, it's also a guarantee that a subset of the population will resort to creative means to avoid paying those taxes. So it is that L.A.'s ultra-wealthy have found myriad ways around the mansion tax. First, there was a rush of mansions that were put on the market and sold before April 2023, when Measure ULA took effect.

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Many of Hollywood's biggest celebrities are suspected of having taken this route. One possible example is Mark Wahlberg, who sold his mansion for $55 million in February of 2023. By closing the deal before April, he saved himself a little over $3 million in Measure ULA taxes. Other mansion owners took their houses off the market and converted them to luxury short-term rentals.

A New And Even More Ingenious Tax Avoidance Strategy

The latest gambits employed by wealthy property owners to avoid taxes under Measure ULA are equal parts cunning and simplistic. Imagine that you've been given a prototype Air Jordan shoe that was valuable but marked not for resale. You could theoretically sell an ordinary, and otherwise worthless, Michael Jordan bobblehead doll for $20,000 that came with a "free" pair of prototype Air Jordans as a bonus for the buyer.

This is a simple way of explaining the shell game some people are playing to avoid the mansion tax. Some property owners have subdivided their $20 million mansions into four equal-sized lots of $4,999,999 each and sold all four lots to the same buyer. This is legal and because the transactions are for less than $5 million, they are only subject to the base tax rate on conveyances, not the mansion tax.

Other property owners are selling their villas and mansions for $4,999,999, regardless of their size or value. Then they are cutting supplemental agreements, apart from the $4,999,999 purchase price, to sell the contents of the house, including art, furniture and fixtures, to the buyers for the same amount they took off the property's "real" sale price. By transferring property like this, they skirt the mansion tax.

It's An Ugly Reality

It's hard not to be upset by this kind of legal chicanery. If you have enough money to buy or sell a property worth more than $5 million, you are on the "have" side of the have-and-have-not equation. That also means you likely have people around you whose job it is to look out for your best interests and save you money whenever possible.

If you were selling your mansion and your accountant or tax lawyer said you could save millions of dollars in taxes with this perfectly legal shell game, would you pay the tax? It's an ugly reality but also a reminder that separating the wealthy from their wealth is difficult. Human nature is what it is, and no government has ever been able to change that.

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