In November 2022, 57% of Los Angeles voters approved a new measure known as the “mansion tax", which went into effect April 1st. The goal of this measure is to raise hundreds of millions of dollars of funding for projects promoting housing construction and alleviating the homeless problem across the city. In this article, we will explore whether this tax is efficient, and the likelihood that it will make its way to Silicon Valley.

Before the mansion tax was enacted, the city and county of Los Angeles would only charge very low transaction costs that averaged below a quarter of a percentage. These fees are exponentially increasing, with the city now imposing a 4% transfer tax on sales of property over $5M, and a transfer tax of 5.5% for sales of property over $10M.  

The LA mansion tax is projected to greatly lessen the demand for upper-end housing and lower the supply of new upper-end homes that are being constructed. This is due in large part to the very high additional costs that will now be going to taxes, lessening builder’s profit and their financial incentive to build homes. This tax applies to both residential and commercial properties and is projected to impact commercial and multi-family properties even more, since they generally sell for over $5M. Bob Weiss, an LA attorney who specializes in assisting commercial transactions, states that this tax will be “a disaster for the commercial real estate business. The tax itself will create a tremendous decline in values.”¹  

While it is still too early to ascertain the future impact of this tax, forecasts indicate that sellers will be less-inclined to sell and developers less-inclined to build homes, exacerbating California’s home shortage. Additionally, this tax is projected to lower demand, with many analysts stating that this tax “is going to be the hardest hit to the real estate market that we’ve seen since 2007.”² Panicked sellers dropped prices or incentivized buyers to close before April 1st to avoid the tax, with some sellers even throwing in a Bentley if they could close on their home before the tax took effect.  

Other spillover effects include towns that have not enacted increases in transaction costs seeing more interest as developers seek to avoid this tax. Jason Oppenheim, one of LA’s top agents, feels that this tax will end up pushing developers out of the city. “A 4% or 5.5% tax equates to 20% to 30% of developer profits,” Oppenheim said. “So those developers will choose to develop in other luxury communities where they won’t have to pay the tax, such as Beverly Hills, West Hollywood or Newport Beach.” Oppenheim also believes the law creates market inefficiencies such as developers getting more money for selling a home for $4.99M without the tax, versus $5.2M with the tax.³

This tax, if ever enacted locally, would be a large impediment to selling, further exacerbating Silicon Valley’s chronic shortage of homes and further encouraging migration of affluent individuals to other states. With our supply of homes declining for the last twenty years due to sellers not wanting to lose their low Prop 13 property tax basis or pay capital gains, any additional transaction fees would further reduce the number of homes available for sale. Furthermore, given the high prices of Silicon Valley real estate with many cities having median home prices well over $5M, if this tax were enacted locally it would simply be a “home tax,” as most local homes are certainly not mansions. 

Given that Silicon Valley residents already pay amazingly high taxes, including the highest state income tax and one of the highest sales tax rates in the entire nation,
I am hopeful that Silicon Valley avoids the high transaction costs other cities are enacting. These additional costs will only further reduce the supply of homes available, and lead to greater home scarcity and as a result, higher prices.