In addition to navigating through the uncertainty of current economic forecasts, real estate professionals should also be aware of a growing trend in the Golden State: real property transfer tax hikes. Recently, many California cities have increased their real property transfer tax rates, and some municipalities have upcoming voter initiatives on their November 2022 ballot that, if approved, would significantly escalate transfer tax rates.

Cities appear to be motivated by two policy concerns when raising transfer tax rates: (1) financial interests (where cities want to raise money to finance affordable housing and homelessness prevention programs) and (2) anti-gentrification concerns (where cities want to halt community displacement by raising tax rates on new real estate investments). These tax hikes could prove to be material issues for real estate developers, investors, lenders, and other industry stakeholders.

Below is a summary of recently approved and proposed transfer tax hikes throughout a variety of California cities.

San Francisco

Approved through a voter initiative (Proposition I) in 2020, the City and County of San Francisco established the following real property transfer tax rates:

• Transactions greater than $100 but less than or equal to $250,000, a tax rate of $2.50 for each $500 or portion thereof (an approximate tax rate of 0.5%);
• Transactions greater than $250,000 but less than $1 million, a tax rate of $3.40 for each $500 or portion thereof (an approximate tax rate of 0.68%);
• Transactions of at least $1 million in value but less than $5 million, a tax rate of $3.75 for each $500 or portion thereof (an approximate tax rate of 0.75%);
• Transactions of at least $5 million in value but less than $10 million, a tax rate of $11.25 for each $500 or portion thereof (an approximate tax rate of 2.25%);
• Transactions of at least $10 million in value but less than $25 million, a tax rate of $27.50 for each $500 or portion thereof (an approximate tax rate of 5.5%); and
• Transaction of $25 million or more, a tax rate of $30.00 for each $500 or portion thereof (an approximate tax rate of 6.0%).

(City and County of San Francisco, Office of the Accessor-Recorder, Transfer Tax, available here.)

San Jose

The City of San Jose has a flat transfer tax rate of $1.65 per $500 or fractional portion of real property value (an approximate 0.33% tax rate). (Santa Clara County, Real Estate Recording, available here.) However, in 2020, voters approved Measure E, which levies an additional transfer tax on properties worth $2 million or greater; it became effective July 1, 2020. (Santa Clara County, Office of the County Clerk-Recorder, Measure E, available here; San Jose, Measure E, available here.) More specifically, Measure E established an additional 0.75% tax on real property transfers between $2 million and $5 million, a 1.0% tax on transfers over $5 million and up to $10 million, and a 1.5% tax on transfers greater than $10 million.

Culver City

Effective on April 1, 2021, Culver City, through a voter initiative (Measure RE), increased its fixed 0.45% real property transfer tax to the following rates:

• 0.45% on transfers below $1.5 million;
• 1.5% on transfers from $1.5 million to $2,999,999;
• 3.0% on transfers from $3 million to $9,999,999; and
• 4.0% on transfers $10 million and above.

(Culver City, Measure RE – November 3, 2022, available here.)

Los Angeles (City)

The current transfer tax rate in the City of Los Angeles is $4.50 per $1,000 of value (an approximately 0.45% tax rate). (Los Angeles County Registrar-Recorder/County Clerk, General Information, available here.) The Los Angeles City Council approved placing an initiative, Measure ULA, on the November 2022 ballot. If approved, Measure ULA would provide an additional 4.0% tax on the transfer of properties in the City of Los Angeles that are valued at over $5 million and below $10 million, while those valued at $10 million or above would face a 5.5% rate. (Los Angeles City Measure ULA, available here.)

Santa Monica

In November 2020, Santa Monica voters approved Measure SM. It established a transfer tax of $3.00 per $1,000 or a portion thereof (a 0.3% tax rate) on real estate transfers under $5 million and a tax of $6.00 per $1,000 or a portion thereof (a 0.6% tax rate) on real estate transfers at $5 million and above. Measure SM became effective on March 1, 2021. (Santa Monica, Documentary Transfer Tax, available here.)

This fall, Santa Monica voters will decide whether to further increase the city’s transfer tax rates as two competing transfer tax initiatives are on the city’s November 2022 ballot. Below are summaries of both measures:

• Measure GS: if approved, this measure would establish a $56.00 transfer tax per $1,000 (a 5.6% tax) of value for property transfers of $8 million or more.
• Measure DT: if approved, this measure would establish a $25.00 transfer tax per $1,000 (a 2.5% tax) of value for property transfers of in excess of $8 million. Unlike Measure GS, Measure DT has a sunset clause. The tax increase would only be effective through February 28, 2033, unless Santa Monica City Council decides, by a supermajority vote, to extend Measure DT by five years. Measure DT also has a partial tax exception for nonprofit corporations and community land trusts.

(City of Santa Monica, General Election 2022, Measure GS, available here; City of Santa Monica, General Election 2022 Measure GS Text, available here; City of Santa Monica, Proposed Measure DT Text, available here; City of Santa Monica, General Election 2022 Measure DT, available here.)

If both initiatives pass, the measure with the most votes becomes law; the winning measure would become effective starting March 1, 2023. (City of Santa Monica, Proposed Measure GS Text, available here; City of Santa Monica, Proposed Measure DT Text, available here.)

Takeaways

As city transfer taxes throughout California vary and the current political climate has seen significant surges in real property transfer tax rates, please reach out to the Real Estate Department of Greenberg Glusker LLP with questions on how this growing spike in transfer tax rates may impact specific sales, acquisitions, or other areas of strategic real estate planning.