California has more than 20% of the nation’s entire housing market when measured by value, according to Zillow. Given the high value of the state’s real estate portfolio, it is no surprise that California has regularly been a forerunner in emerging tax policies. Recently, many California cities, including flagship markets in the Bay Area and Southern California, have increased their real property transfer tax rates.
Background
Cities are motivated by two main policy concerns when raising transfer tax rates: (1) financial interests (e.g., cities want to raise money to finance affordable housing and homelessness prevention programs) and (2) anti-gentrification concerns (e.g., where cities want to halt community displacement by raising tax rates on new real estate investments). These tax increases will materially impact real estate developers, investors, lenders and other industry stakeholders in these cities. Given California’s trendsetter status, these new tax policies may eventually affect real estate professionals with assets outside of California.
Below is a summary of recently approved transfer tax hikes throughout a number of California cities.
Los Angeles (City) (Measure ULA)
The current transfer tax rate in the City of Los Angeles is $4.50 per $1,000 of value (an approximately 0.45% tax rate), per the Los Angeles County Registrar-Recorder/County Clerk General Information. Including the 0.11% Los Angeles County transfer tax rate, the total transfer tax rate in the City of Los Angeles is 0.56%. However, in the fall of 2022, Los Angeles City voters approved Measure ULA, which establishes the following tax levies on top of this 0.56% city and county tax:
- An additional 4.0% tax on real property transfers valued at over $5 million and below $10 million; and
- An additional 5.5% tax on real property transfers valued at $10 million or above.
The City of Los Angeles will adjust the property value threshold subject to the Measure ULA tax annually based on the Consumer Price Index. Measure ULA’s tax levy will cover the full gross value of the sale. Therefore, unlike the 0.56% city and county transfer levy, the Measure ULA tax will include the entire “value of any lien or encumbrance remaining thereon at the time of the sale,” including any transferred mortgage indebtedness.
Measure ULA became law on January 1, 2023, but the new tax does not affect transactions until April 1, 2023. Transfers to qualifying nonprofit entities, public agencies and housing organizations are exempt from Measure ULA’s tax levy.
Santa Monica (Measure GS)
Santa Monica voters also approved a real estate transfer tax increase measure during the fall 2022 elections. Effective March 1, 2023, Measure GS establishes a $56.00 transfer tax per $1,000 of value for property transfers of $8 million or more (an effective tax rate of 5.6%).
Effective as of March 1, 2023, the following transfer tax rates will apply to real properties in Santa Monica (calculated together with Los Angeles County’s existing 0.11% tax in their totals):
- A 0.41% rate if the value is less than $5 million;
- A 0.71% rate if the value is $5 million or more; and
- A 5.71% rate if the value is $8 million or greater.
These tax rates will apply to the entirety of the property value (minus any liens or encumbrances “remaining thereon at the time of sale”). For example, if the property is worth $9 million, the entire transfer tax will be approximately $513,900.00 (e.g., a tax rate of 5.71%).
Culver City
Effective on April 1, 2021, Culver City, through a voter initiative (Measure RE), increased its fixed 0.45% real property transfer tax (0.56% if combined with Los Angeles County’s 0.11% transfer tax rate) to the following rates (calculated together with Los Angeles County’s 0.11% transfer tax rate in their totals):
- 0.56% on transfers below $1.5 million;
- 1.61% on transfers from $1.5 million to $2,999,999;
- 3.11% on transfers from $3 million to $9,999,999; and
- 4.11% on transfers $10 million and above.
San Francisco
Approved through a voter initiative (Proposition I) in 2020, the City and County of San Francisco established the following real property transfer tax rates:
- Transactions greater than $100 but less than or equal to $250,000, a tax rate of $2.50 for each $500 or portion thereof (an approximate tax rate of 0.5%);
- Transactions greater than $250,000 but less than $1 million, a tax rate of $3.40 for each $500 or portion thereof (an approximate tax rate of 0.68%);
- Transactions of at least $1 million in value but less than $5 million, a tax rate of $3.75 for each $500 or portion thereof (an approximate tax rate of 0.75%);
- Transactions of at least $5 million in value but less than $10 million, a tax rate of $11.25 for each $500 or portion thereof (an approximate tax rate of 2.25%);
- Transactions of at least $10 million in value but less than $25 million, a tax rate of $27.50 for each $500 or portion thereof (an approximate tax rate of 5.5%); and
- Transactions of $25 million or more, a tax rate of $30.00 for each $500 or portion thereof (an approximate tax rate of 6.0%).
San Jose
Prior to 2020, the City of San Jose only had a flat transfer tax rate of $1.65 per $500 or fractional portion of real property value (an approximate 0.33% tax rate—0.44% if combined with Santa Clara County’s 0.11% transfer tax rate). However, in 2020, voters approved Measure E, which levies an additional transfer tax on properties worth $2 million or greater. Measure E established an additional 0.75% tax on real property transfers between $2 million and $5 million, a 1.0% tax on transfers over $5 million and up to $10 million, and a 1.5% tax on transfers greater than $10 million; it became effective on July 1, 2020.
Takeaways
As city transfer taxes throughout California vary and the current political climate has seen significant surges in real property transfer tax rates, please reach out to the Real Estate Department of Greenberg Glusker LLP with questions on how this growing spike in transfer tax rates may impact specific sales, acquisitions, or other areas of strategic real estate planning.
Angus C. Beverly is a real estate attorney at Greenberg Glusker LLP, where his practice focuses on a broad spectrum of real estate matters involving acquisitions and dispositions, lease negotiations, financing, development and asset management of residential, commercial and mixed-use properties. With prior experience in incidental matters such as land use and zoning, Angus is able to utilize a unique cross-disciplinary approach when advising clients regarding environmentally impacted properties. Angus is included on the Best Lawyers: Ones to Watch® in America list for 2023 in Real Estate Law and Land Use and Zoning Law and frequently authors articles on real estate-related topics.
