How sellers of L.A. mansions are dodging a tax to help the homeless

LOS ANGELES - A tax on mansion sales in Los Angeles was intended to raise millions to fight homelessness. It hasn't quite worked out that way.

Instead, wealthy Angelenos rebelled, putting the brakes on sales of homes priced at $5 million and above - those targeted by the initiative - with the result that the tax has raised far less money than expected since taking effect April 1.

The money is intended for eviction prevention, tenant outreach, emergency assistance, affordable housing acquisition and more. Backers of the tax, which passed via a ballot initiative with 58 percent of the vote last year, say they expect sales to pick up once the real estate market adjusts to the change. But taxpayer rights groups and landlord organizations have filed suit to stop the tax, and until the litigation is resolved, some owners will hold off selling, and city officials will proceed cautiously on spending money they might end up giving back.

Meantime, debate over the legislation has laid bare the vast gap between the rich and the poor that's come to characterize life in Los Angeles, and much of the country, in recent years. The city's homelessness crisis, with more than 40,000 people living on the street, is related to a shortage of affordable housing so severe that even some with jobs cannot afford to rent property, much less buy it - problems that the so-called "mansion tax" is intended to address.

The homeless population increased by 32 percent from 2018 to 2020, but has grown more slowly in the years since, according to the Los Angeles Homeless Services Authority. Los Angeles has long been a land of extremes, but homelessness may be the ultimate test of whether the liberal dream factory that makes entertainment for the globe can resolve a crisis of humanity in its own backyard.

Opponents argue that a $5 million home can hardly be called a mansion in Los Angeles these days, when the super-rich reside in properties with price tags of $20 million and above.

"It's a completely ridiculous tax. First of all, $5 million in Los Angeles is not a mansion," said Danielle Revelins, an agent with Compass real estate.

The measure imposes a 4 percent tax on properties listed between $5 million and $10 million; at $10 million and above, the tax bumps up to 5.5 percent.

Revelins has watched in frustration as the city and state have spent millions of taxpayer dollars on the homelessness problem, without making much progress - another reason she opposes the tax. "This government is insane the way they squander money," she said.

Supporters of the tax ridicule such arguments. A study led by Peter Dreier, a professor of urban and environmental policy at Occidental College, found that fewer than 3 percent of single-family properties sold in L.A. in the 2021-2022 fiscal year cost $5 million or more.

"Ninety-eight percent of the homeowners in L.A. won't feel this at all, and the ones who will feel it can afford to pay it," Dreier said. "This is rich people going on strike against the poor - and this includes some movie stars and such."

In the months before the tax took effect, high-end real estate sales exploded in L.A., as homeowners maneuvered to unload costly properties ahead of the new levy. The Los Angeles Times reported that celebrities including Brad Pitt and Mark Wahlberg were among those selling homes in the days leading up to April 1. A representative for Pitt declined to comment, while representatives for Wahlberg did not respond to a request for comment.

In the final days of March, some real estate agents even threw in free luxury cars to get clients to close sales before April 1.

"To me, that is the ultimate in selfishness," Dreier said. "Giving away a luxury car to avoid a tax that will help people that sleep in their car."

A handful of cities, including San Francisco and New York, have passed taxes specifically aimed at high-value real estate transactions, but Los Angeles appears to be the first to specifically try to use it to alleviate the city's housing crisis.

Revelins has a home listed in the Venice Beach neighborhood of L.A. for $4,999,000 - a price tag she freely admits is aimed at avoiding the $5 million trigger for the new tax. The three-story, 3,961-square-foot property is an "entertainer's dream," according to the listing, with a "floating staircase" and hardwood floors.

"That property is worth a little bit more," Revelins said. "But if we listed it at $5.2, they would have to pay $200,000″ in taxes, money that Revelins says the city would squander.

Multiple homes around Los Angeles are listed just below $5 million, and that's just one strategy sellers are using to avoid the "mansion tax," formally called ULA, or "United to House L.A." Other tricks include separating properties into lots, or dividing a property between two spouses as "tenants in common" who can then sell their shares separately.

Those are among the ideas proposed in an April blog post by law firm Ervin Cohen and Jessup titled "Nine Ideas to Avoid the Effect of Measure ULA - The New Mansion Tax."

In the first quarter of the year, there were 248 sales of commercial and residential properties priced at $5 million and above in Los Angeles, according to Nathan Stark, an account executive at Chicago Title. Since April 1 through mid-June, there were only 34 sales.

Stark and others argue the tax is counterproductive, since the city is losing out on transfer tax revenue it would be collecting if sellers weren't holding back.

"I truly think that it goes with good intentions," Stark said. "But I feel like the way in which they're doing this is actually going against their goals because it's making it cost prohibitive to sell properties that are $5 million or more."

In addition to the ongoing litigation, California voters will vote on a 2024 ballot initiative that would give them greater say over taxation in the state, and require two-thirds support for local tax increases, retroactive to Jan. 1, 2022. That would have the effect of undoing the "mansion tax."

Before the 2024 election, city officials say they hope Angelenos will have seen positive impacts from the new "mansion tax" and support keeping it in place.

"I think that it is critical that all of us, all of us, think really hard about what we see on our streets and the absolutely existential nightmare that so many tenants, so many unsheltered folks and folks of all wealth ranges live through in terms of the homelessness and housing security crisis we have," said Greg Good, a senior adviser at the Los Angeles Housing Department.

"It is unfortunate that folks are working to avoid it, but I'm also confident that Angelenos will eventually become comfortable with the return, and the return is going to be potentially the greatest movement of the needle in terms of the level of investment we need and in terms of the programs around building more housing and preventing folks from falling into homelessness," Good said.

Proponents initially hoped the tax would raise some $900 million a year, based on past-years sales. But with the housing market slowing because of rising interest rates, the city administrative officer pegged first-year revenue closer to $670 million. Because of the uncertainty around the litigation, Mayor Karen Bass included just $150 million from the tax as part of the $1.3 billion to fight homelessness in her first budget proposal.

Through the end of May, the tax had raised a total of $15.5 million, based on five transactions in April and 24 in May, city officials said - possible evidence that sales on $5 million-plus properties are picking up despite opposition from many real estate agents and sellers. The city intends to spend the money only when it's in hand, just in case opponents prevail in litigation and they have to return it.

That led to dispute at a recent hearing of the city commission appointed to oversee the funds, with citizens from multiple activists groups pleading with city officials to use all of the $150 million Bass has budgeted from the tax, even before it's received.

The concerns articulated by activists, homeless people and at-risk tenants at the hearing were a far cry from the complaints of real estate agents dealing with multimillion-dollar properties. Speakers talked about a life filled with daily fears about where they would get food for their children or whether they would have a safe place to sleep that night.

One older renter, Lisa Spearman, spoke of the abysmal conditions at her apartment building where mold lined the walls and her landlord ignored her complaints. She and others in similar positions or without residences hope the tax could throw them a lifeline to fight their landlords or get into safer and more secure housing.

"I have been living in mold. . . . When I come home, I can smell mold and I'm coughing and choking all the time," Spearman said. "I'm scared to go home, I'm in fear of my life."