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California’s social structure and tax system have long been a source of envy for its peers. However, the top 10% California’s tax-paying subset, a group with a significant tax burden, is now being asked to pay even more. This group, which contributes 76% of available income taxes and 18% of property taxes, is targeted for additional taxation. The question arises: Why are these figures — 76% and 18 — not enough? California’s 'soak the rich’ mentality is potentially impacting the financial stability of this group.
Mansion taxation, a term referring to the taxation of expensive homes, is a reality in Los Angeles. However, the way these taxes are collected is a cause for concern. They are imposed on all property sales, including residential, multi-tenant rentals, and commercial properties. This is a clear case of taxing the rich, a move that may seem appealing on the surface but is a disguised tax on property owners. The term ‘mansion’ is a misnomer as the tax applies to all properties, not just mansions, which is an apparent injustice and a cause for concern.
Map of Los Angeles:
Seven U.S. states currently have some form of mansion tax on the sale of high-priced properties.
The concept of ‘fair share’ often arises in tax discussions, suggesting that individuals should contribute to public services and infrastructure in proportion to their financial capacity. While some see this as a noble pursuit for a more equitable society, others perceive it as a Marxist/progressive redistribution strategy akin to institutional theft. KarMarx’s's maxim, from each according to his ability, to each according to his needs, does not correspond to a society where work and effort result in an increased standard of living and financial stability.
As the financially successful are targeted, many are left questioning their place in a state that treats their success punitively. The disillusionment is not just a feeling; it’s a reality, with tens of thousands choosing to leave. This departure has left a void in the state’s appreciation of its contributions, resulting in significant losses for the California tax base. The negative consequences of this tax are not just theoretical; they are tangible and immediate.
The government’s first line of attack is always directed towards those who have the most to lose.
The mansion tax, also known as additional property transfer payments, has significantly impacted the upper-end sales market. This burdensome taxation, which took effect on 11 April 2023, has effectively halted the market. The high additional costs deter potential buyers, resulting in a significant decline in sales. The implications of this tax are not just theoretical; they are tangible and immediate, with the real estate market feeling the brunt of it.
In my article,‘' McMansion Blues, I delve into the real-life implications of the tax burden. I discuss how people can get trapped in their properties because the tax burden becomes so demanding that it becomes impractical, if not impossible, to sell. Remember that a sale has costs, including federal and state capital gains taxes, and the new replacement property typically has a significantly higher property tax burden and debt payments. Property taxes and loan payments could double or triple, making it unwise to sell and buy something else. Being stuck in our McMansions is not all that bad, but it’s certainly not a choice many would willingly make.
While California has not yet passed a mansion tax, the approval of Proposition ULA ( United to House L.A.) in Los Angeles County has set a concerning precedent. The thresholds were originally $5,000,000 and $10,000,000.. Properties sold after 30 June 2024, above $5,150,000, are subject to a 4% overage tax, while properties above $10,300,000 will pay a 5.5% tax. This additional tax burden, along with other factors, has devastated high-end values in Los Angeles Real Estate, with sales plummeting by 68% in the last year —a worrying trend for the real estate market that should not be overlooked.
If you sell any property for $5,150,000, you will pay an additional $206,000 in capital gains and state and federal taxes. If you sell any property for $10,300,000, you will pay an extra $566,500 in capital gains taxes.
Fortunately, there may be a strategy to alleviate the burden of the mansion tax. Typically, upper-end homes are held by trustees of a family trust, who are occupants. If there are co-trustees, such as a husband and wife, they can convey title out of the trust into a fractional ownership form called a tenancy-in-common. This way, each party could protect its property interest and halve the burden. Each of the two parties will be subject to the taxation of one-half. Consider consulting a Real Property attorney for possible workaround strategies. This advice can empower you to take control of your financial situation in the face of this tax.
The additional taxation proceeds aim to fund six programs: short-term emergency rental assistance, eviction defense, tenant outreach and education, direct cash assistance for low-income seniors and individuals with disabilities, tenant protections, and affordable housing production. These programs are designed to support vulnerable populations and address issues related to housing affordability. However, some may question whether the benefits of these programs justify the additional tax burden.
Affluent property purchasers will opt for neighboring cities outside of Los Angeles, which are not subject to taxation. Axme to death and watch me get out of Dodge, referring to the illusion of Dodge City, Kansas, where citizens left to avoid the gunfighters, gamblers, brothels, and saloons. In California, we find that the government-sponsored lawlessness and violence are legalized and promoted, leading to retail theft. Excessive regulation and taxation have become both normalized and institutionalized. This trend could have a substantial impact on the California real estate market. Pick up the news daily and notice the retailers closing shop because of theft.
If you find value in this article and share our concerns about the mansion tax, we would like you to take action. By forwarding this article to friends and associates, signing up for my articles on www.danharkey.com, and considering contacting your local representatives or participating in community discussions, you can contribute to the movement against the mansion tax. Together, we can make a difference in preserving the financial well-being of our community. It’s time to take a stand, make our voices heard, and feel empowered in the fight against the mansion tax.