Transfer Taxes

      

      

       We sold two buildings last month in Los Angeles county - Chatsworth to be exact. The deal was lengthy - spanning the horrors of the changing finance market  and Jerome Powell’s ratcheting up of bank borrowing rates. But alas, we got it done, satisfied the buyer’s 1031 exchange, and provided the seller a long term lease from which to operate his business. 
 
Chatsworth, as well as most of the San Fernando Valley cities is considered the city of Los Angeles. For context, imagine if all North Orange County cities of Anaheim, Buena Park, Orange, Placentia, Brea, La Habra and Fullerton weren’t sovereign and were under the purview of say Santa Ana? Yeah. That’s the situation. Consequently, Los Angeles wields tremendous clout when determining taxation - especially in the transfer of real property. 
 
One line item in our estimated closing statement caused the county recorder to pull our file. It seemed the transfer tax was improperly computed - or so they thought. When our able title officer pointed out the correct calculation - which appeared on the deed - the county capitulated and allowed the recording. Never, had I spent so much time understanding how such taxes are determined. My education, I believed was column worthy. But recently, another development in Los Angeles known as Measure ULA or the “mansion tax” - which was passed by voters - encouraged a deeper dive. So here we go. 
 
From the website  https://www.deedclaim.com/california/documentary-transfer-taxes/ - a wonderful resource, BTW - “California’s Documentary Transfer Tax Act allows counties and cities to collect tax on documents that transfer real estate. The Documentary Transfer Tax Act is broadly worded, imposing a tax on: 
 
each deed, instrument, or writing by which any lands, tenements, or other realty sold within the county shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers, or any other person or persons, by his or their direction, when the consideration or value of the interest or property conveyed (exclusive of the value of any lien or encumbrance remaining thereon at the time of sale) exceeds one hundred dollars …” In reading further, “this language covers almost every interest in property that can be created or transferred under California law. It includes:
·        Outright property transfers;
·        Tenancy in common interest;
·        Joint tenancy interests;
·        Community property interests;
·        Life estates and remainder interests;
·        Long-term leases;
·        Non-temporary easements;
·        Mobile homes installed on permanent foundations.
A transfer of any of these interests is subject to documentary transfer taxes. The documentary transfer tax is due even if the instrument is not recorded in the county real estate records. The creation and delivery of the deed causes the documentary transfer tax to become due.” 
 
Most counties in California impose a transfer tax equal to $1.10 per thousand dollars of value. In addition to the county rate, cities may impose additional documentary transfer taxes. From www.deedclaim.com  “The amount that the city may impose depends on whether the city is a charter city or a general law city. A charter city is a city in which the governing system is defined by the city’s own charter instead of by California law. Charter cities have supreme authority over their municipal affairs and have broad leeway to impose their own tax rates. Many of California’s 121 charter cities have enacted their own tax rates. Cities that are not charter cities are known as general law cities. General law cities may impose a transfer tax equal to one-half of the rate imposed by the county. When the city imposes a tax, the county transfer tax is reduced by the amount of the city’s transfer tax so that the amount that the taxpayer pays remains at 55 cents per $500 of property value or consideration.
 
The website below gives you a breakdown of all the counties and cities in California, which are charter and general law, and the respective transfer taxes. But to save you some reading - Anaheim, Buena Park, Cypress, Huntington Beach, Irvine, Los Alamitos, Newport Beach, Placentia, Santa Ana and Seal Beach are charter cities. The balance of OC is general law. http://www.californiacityfinance.com/PropTransfTaxRates.pdf
 
Now to Measure ULA which recently passed in Los Angeles city. From www.gibsondunn.com “Measure ULA, commonly known as the “mansion tax,” would impose a new “Homelessness and Housing Solutions Tax” on transfers of residential and commercial real property in the city of Los Angeles valued in excess of $5 million.[1]  The revenue raised by the new tax, expected to be between $600 million and $1.1 billion annually, is intended to be used to fund affordable housing and tenant assistance programs.  As of the date of this Client Alert, the measure is ahead in the latest vote count. Under the measure, sales of residential and commercial real property valued at over $5 million but less than $10 million would be subject to an additional tax at the rate of 4%, while sales of properties valued at $10 million or more would be subject to an additional tax at the rate of 5.5%.  The new tax would apply to the entirety of the sale value, not solely the amount in excess of the $5 million and $10 million thresholds, and regardless of whether the property is sold at a gain or a loss.  The thresholds would be adjusted each year based on inflation.  The tax would apply to property sales occurring on or after April 1, 2023. The new tax would be in addition to the existing documentary transfer tax imposed on property sales in the city of Los Angeles, which is imposed at a combined city and county rate of 0.56%.”
 
So what does all of this mean? Selling a property greater than $5,000,000. in Los Angeles just got a lot more expensive. A $10,000,000 property used to cost $56,000 to transfer. Starting April 1, 2023 that same $10,000,000 transfer will be taxed at $606,000 - more than a ten fold increases. And by the way, a $5,000,000 residence is a big deal. A commercial deal in LA will trigger the tax on a very small square footage - affecting many occupants who own their building and choose to sell. But so what? We’re in the OC. Just this. Will unfunded pension liabilities straining city budgets cause city governments to search for revenues to bridge the gap? 10 of the 34 cities within Orange County have charters that allow such an increase in transfer taxes - with voter approval. We will see. 
 
Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.blogspot.com.