April 1 Transfer Tax Dents Investor Demand
By Ryan Patap
October 6, 2023 | 7:32 AM
Multifamily sales activity in Los Angeles’ city limits remained restrained in the third quarter due to the additional transfer tax implemented on April 1.
In total, 132 properties worth just over $366 million transacted during the quarter. Activity represents around a third of the dollar volume witnessed in the first quarter.
Of the properties that traded in the city, only 13 closed with a sale price above $5 million. This compares to 66 transactions in the first quarter, as some sellers rushed to complete multifamily transactions before April 1 to avoid the tax.
Sellers in the city now face an additional 4% transfer tax for any sale above $5 million and 5.5% for any sale above $10 million. The new transfer taxes are on top of the 0.45% transfer tax the city had in place before April.
Activity in the third quarter follows an equally tepid second quarter, which saw $377 million of properties transacted. Only seven properties traded that quarter for more than $5 million. Multifamily transaction activity in the city since the first quarter has not been this slow since early 2011.
Year-to-date activity in the rest of Los Angeles County contrasts with activity inside the city limits. Transaction volume in the third quarter was down from the first quarter in the rest of the county by 30%. During the first quarter, the City of Los Angeles saw just over 60% of all office sales activity on a dollar basis in Los Angeles County. However, the city saw just over 40% of dollar activity in Los Angeles County in the third quarter.
Historically, the City of Los Angeles sees a higher percentage of office sales on a dollar basis in the greater metropolitan area. During the past 10 years before the second quarter, the city saw 53% of all office dollar volumes in Los Angeles County.
Activity will likely remain restrained in the city in the coming quarters due to legal challenges and a statewide ballot initiative in November 2024 called the Taxpayer Protection and Government Accountability Act, which would end the mansion tax in Los Angeles and other similar measures if passed. Investors may wait to see the final fate of the transfer tax before deciding to buy or sell.