- On the new season of “Selling Sunset,” there’s yet more drama over pricey houses.
- This time, it hinges on Los Angeles’ new mansion tax, which impacts homes sold for over $5 million.
- The tax is designed to fund affordable housing, but it may be flawed.
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 homebuyers.
“This is 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 latest season — and the high-end real estate industry was in a tizzy. The owner of one $26 million, 13,000-square-foot home the agents were trying to sell would have to pay an extra $1.43 million in taxes under the new law. The policy, which went into effect on April 1, 2023, levies an extra 4% tax on homes sold for more than $5 million and a 5.5% tax on those over $10 million. The ‘”Selling Sunset” agents were terrified their business would dry up with owners scared off by the new tax, on top of high interest rates.
“Those are huge numbers and I think it’s a massive detriment to the real estate market as a whole,” one of the agents, Nicole Young, tells the camera.
The agents’ boss at the Oppenheim Group brokerage, Jason Oppenheim, reportedly told clients in an email that the new tax “defies common sense and basic logic.”
It’s not often that a tax measure becomes a vehicle for reality show drama. But the omnipresence of LA’s mansion tax is felt throughout the seventh season of the soapy real estate reality drama, as agents scramble to sell ahead of its implementation, or have tough conversations with their clients. And the Oppenheim brokers — best known for marketing obscenely flashy homes while making similarly showy sartorial choices — aren’t alone.
LA’s new tax was designed to raise dedicated revenue for affordable housing and homelessness prevention, but some advocates might agree with the “Selling Sunset” agents that the law is flawed — just not for all the same reasons.
As high-end realtors worry about their sales, some housing advocates are celebrating the new tax. Just 16% of Californians can afford to purchase a single-family home at the state-wide median price of more than $840,000, according to a housing affordability report from the California Association of Realtors. In Los Angeles, you’d need a minimum income of $198,000 for that to be feasible.
“The affordable housing crisis is really worsening in every corner of the country,” Mari Castaldi, director of state housing policy at the nonprofit Center on Budget and Policy Priorities, told Insider. She added of the city’s mansion tax, “This is a very reasonable and equitable way to generate some resources that can support those needs.”
But even some of the law’s biggest proponents say it has a key flaw. Critics say the tax is likely disincentivizing the development of multi-family buildings — the very construction that would boost the affordable housing supply.
Unintended consequences of a mansion tax
Colloquially known as a mansion tax, United to House LA (Measure ULA) passed in November 2022 with 58% support.
LA’s law has a slew of well-heeled and vocal critics. Real estate interest groups and others have filed two suits over the policy, but both have been dismissed. The court rulings will likely be appealed, and critics of the law are planning other ways to undermine it. But for now, the tax is in effect and is expected to raise about $150 million this year.
LA is not the only city that’s banking on high-end home sales to boost low-income housing efforts. New York and Washington both have state-wide mansion taxes, while the governor of Massachusetts just gave her blessing to municipalities that want to implement a transfer tax on high-value property. The Chicago city council also recently advanced a proposal to bump taxes on homes sold for more than $1 million. Most recently, Santa Fe voted for an additional 3% tax that buyers will pay on homes over $1 million as a way to raise funds for the city’s affordable housing programs.
In LA, Mayor Karen Bass and the city council have already determined what this year’s tax revenue will be spent on. The biggest chunk — $56.8 million — will go to affordable housing projects. Another $30.4 million will fund short-term assistance for tenants and small landlords. And $23 million will go to providing those facing eviction with representation, the LA Times reported.
Shane Phillips, a UCLA housing researcher whose work helped inspire LA’s mansion tax, is worried about the mansion tax depressing new development, particularly of multi-family buildings.
He pushed for the policy to exempt first sales within 10 years of construction so that the tax doesn’t disincentivize developers, who often sell apartment buildings soon after construction is completed.
In LA, at least 10% of units in multi-family buildings are designated for lower-income residents, meaning that if a number of new apartment buildings aren’t built because of the tax, the city could end up losing a number of affordable units that are extremely expensive for the government to build or subsidize.
“We’re taxing these new buildings and the new buildings are maybe going to account for like five or 10% of total revenues, maybe $100 million at most, but we might lose a bunch of privately-built below-market units that will cost us more than $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 kind is a land value tax, he argued, because it both raises revenue and encourages the highest and best use of a piece of land.
The second-most effective are property taxes, he said, as they can be collected regularly, instead of just when a property changes hands. But both of those are politically tricky in California, where property taxes are massively limited by the state’s Proposition 13.
Transfer taxes on expensive property sales have an admirable goal: redistributing some of the riches the real estate industry and homeowners have collected as home values have skyrocketed in recent years. And, when designed effectively, they can have a minimal chilling effect on the market, while raising significant funds.
“There’s a lot of money that’s been made and, to an extent, trying to recapture a small share of that is a very reasonable goal, especially if that money is then spent on helping people who have been harmed by those prices increasing,” Phillips said.
In the months leading up to April 1, it wasn’t just the “Selling Sunset” agents who were scrambling. Sellers across LA did everything they could to unload their properties before the deadline hit, Billy Rose, co-founder of luxury real estate firm 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 “offerings of cars and big commissions and various incentives to try to get a sale to take place” prior to implementation, he said, although he personally doesn’t know of any situations where that actually occurred.
Rose said the new tax, coupled with high interest rates, is contributing to stagnation in the marketplace: “We’re just getting less and less available properties to sell.”
That chilling effect is likely temporary. Castaldi said the impact so far has been skewed by sellers delaying putting their properties on the market to see if the pending legal challenges would get the tax overturned.
Phillips isn’t concerned about the short-term freeze in the high-end real estate market. For the most part, he thinks owners who want to sell their properties will eventually do so, and the rate of transactions will be back to normal in about a year.
Rose said he “can understand why there are people who are sympathetic to taxing multimillionaires,” but that the tax isn’t “going to really sit with these wealthy people.” Instead, he said, it might fall on people struggling with inflation and trying to buy a home, especially with less construction going on.
If the city finds that the mansion tax does disincentivize 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 tweaked to exempt first-time sales, the mansion tax “will unquestionably do more good than harm.”
“Every tax has negative consequences,” Phillips said. “There’s this one specific negative consequence we really need to solve, but other than that there are pretty limited consequences from a tax like this. And having $700 million, a billion dollars a year to spend on affordable housing, and rent assistance, and right-to-counsel and things like that — it’s going to do a lot of good.”
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