Los Angeles Documentary Transfer Tax

Summary

Last year, City of Los Angeles voters approved Measure ULA (the “Ordinance”), which imposes an additional tax

(the “ULA Tax”) on the transfer of real property valued at over $5 million to fund affordable housing and tenant

assistance programs.

In contrast to the existing City and County documentary transfer tax (“Base Tax”), the

ULA Tax applies to the total sales price or value of the property transferred without reduction of any liens or

encumbrances remaining on the property at the time of transfer.

Effective as of April 1, 2023, the Ordinance imposes a 4% tax on all real property transfers valued at $5 million or

greater up to $10 million and a 5.5% tax on all real property transfers valued at $10 million or greater.

The value

thresholds adjust annually, based on the Consumer Price Index.

Also, the ULA Tax is levied in addition to the Base

Tax of 0.56% for total rates of 4.56% and 6.06%, respectively.

The ULA Tax applies to the entire consideration or value of the real property interest at the time of transfer, rather than

an amount in excess of the $5 million and $10 million thresholds, and regardless of whether the property was

transferred at a gain or loss.

Despite being referred to as the “mansion tax,” the ULA Tax applies to all transfers of real property alike, from

residential to commercial real estate so long as the property is situated at least partially within the City of Los Angeles

and the transaction is not otherwise exempt.

RE Investors

and Developers

1. L.A., Cal. Funding Affordable Hous. & Tenant Assistance Programs Through A Prop. Transfer Tax (Nov. 2022).

2. Documentary Transfer Taxes, Gen. Info., L.A. CNTY. REGISTRAR–RECORDER/ CNTY. CLERK, https://www.lavote.gov/home/recorder/property-document-recording/documentary-transfer-

taxes/general-info; L.A.M.C § 21.9.2(b).

3. L.A.M.C § 21.9.2(b).

4. Real Prop. Transfer Tax & Measure ULA FAQ, L.A. OFF. OF FIN., https://finance.lacity.gov/faq/real-property-transfer-tax-and-measure-ula-faq.

5. Documentary Transfer Taxes, Gen. Info., L.A. CNTY. REGISTRAR–RECORDER/ CNTY. CLERK, https://www.lavote.gov/home/recorder/property-document-recording/documentary-transfer-

taxes/general-info.

6. Supra note 4.

7. Id.

KING & SPALDING

Real Estate Hub 2

Los Angeles Documentary Transfer Tax (cont’d)

The Ordinance exempts several transfers from the ULA Tax. For example, transfers to nonprofit entities, Community

Land Trusts, and Limited-Equity Housing Cooperatives are exempt from the tax.

Additionally, the making, delivering,

or filing of conveyances to effectuate a plan of reorganization or adjustment are exempt as outlined in the Ordinance.

Under the Base Tax, transfers in the event of foreclosure or deed in lieu of foreclosure are exempt. However, such

transfers are not expressly exempt under the Ordinance. Pursuant to the Ordinance, the Director of Finance has the

authority to further define “realty sold,” which has a triggering effect on both the Base Tax and the ULA Tax.

This

authority may also be used to expand the scope of the transactions that trigger both taxes.

While the Director has not

issued formal rules or regulations as to “realty sold,” the Real Property Transfer Tax and Measure ULA FAQ page

confirms that “all other transactions which are exempt from the base Real Property Transfer Tax per local, state, or

federal laws and regulations” are exempt from the ULA Tax.

Hence, the FAQ page seems to answer the lingering

question of whether the Base Tax exemptions will apply equally to the ULA Tax.

However, most transfers of interests in entities are not exempt from the ULA Tax. The California Supreme Court has

held that the exemption for continuing partnerships signifies an intention by the legislature to apply documentary

transfer tax (“DTT”) to transfers of interests in entities.

Among the cities and counties that impose DTT on legal entity

transfers is the county of Los Angeles, which enforces the collection of DTT on legal entity transfers where no

document is recorded, but which resulted in more than 50% interest in control of the legal entity being transferred.

Notably, DTT is not applied to real property held by a tax partnership upon the transfer of interests in such tax

partnership if it is considered a continuing partnership within the meaning of Section 708 of the Internal Revenue Code

and it continues to hold the realty.

Therefore, transfers of interests in a tax partnership should not be subjected to

DTT if (a) the property continues to be held by the partnership, and (b) the transfer does not result in termination of

such partnership under Section 708.

Although the City of Los Angeles recently clarified that the Base Tax exemptions also apply to the ULA Tax, it is not

clear how those exemptions will be administered. The ULA FAQ page suggests that the ULA Tax exemptions will be

processed through the City’s refund process following payment of such tax.

However, this information was not

updated in connection with the updated ULA Tax exemptions. Given that exempt transfers under the Base Tax are not

collected upfront, taxpayers may expect that the administration of the ULA Tax will operate similarly, such that the

taxpayer will not be required to pay first and then apply for a refund for transfers that are exempt under the Base Tax.

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8. L.A.M.C § 21.9.13.

9. L.A.M.C § 21.9.6

10. L.A.M.C. § 21.9.11(c).

11. Id.

12. Supra note 4.

13. 926 Ardmore Ave., LLC, v. County of Los Angeles, S222329 (Cal. June 29, 2017).

14. Legal Entity/Corporate Documentary Transfer Tax Collections, L.A. COUNTY REGISTRAR – RECORDER/COUNTY CLERK, https://www.lavote.gov/home/recorder/legal-audits-and-tax-

collections/legal-entity-corporate-documentary-transfer-tax-collections (providing that the county’s collection is consistent with case law that defines “realty sold” as having the same meaning as changes

in ownership for property tax purposes in California Revenue and Taxation Code § 64(c)(1)).

15. L.A.M.C § 21.9.8.

16. Id.

17. Supra note 4.

18. See L.A.M.C. § 21.9.11(c) (providing that the Director of Finance is authorized to establish procedures for administering exemptions to the Base Tax and ULA Tax).