Navigating the Mansion Tax in LA County: How Deferred Sales Trust Can Be Your Game-Changer
With the recent implementation of Measure ULA—popularly dubbed the “mansion tax”—property sellers in Los Angeles County are grappling with a new financial landscape. This ordinance imposes a steep tax on property sales above $5 million, creating a significant financial burden. However, a powerful financial tool called a Deferred Sales Trust (DST) could potentially offset this burden and transform the way we view luxury and commercial property sales in this new era.
Understanding Measure ULA
Measure ULA was passed with the aim to fund homeless services and affordable housing. It levies a 4% tax on property sales over $5 million and increases to 5.5% on sales over $10 million. This means a $5-million sale could include an extra $200,000 tax bill and a $10-million sale, a staggering $550,000. Typically paid by the seller, this tax can substantially reduce their net proceeds from the sale.
Enter the Deferred Sales Trust
While the mansion tax may seem daunting, the Deferred Sales Trust (DST) offers a potential solution. Essentially, a DST is an arrangement that enables the seller to defer capital gains tax on the sale of their property, potentially boosting the net proceeds from the sale and creating a stream of income over time.
Here’s how it works: Instead of selling the property directly to the buyer, the seller transfers the property to a DST. The trust then sells the property to the buyer, deferring the recognition of capital gain. The seller receives an installment contract from the DST, promising to make payments over an agreed-upon term.
The Benefits of a DST
The power of the DST lies in its potential to increase the seller’s proceeds from the sale. Because the DST allows the deferment of capital gains tax, it can mean more of the seller’s money is available for reinvestment right from the close of escrow.
In the case of Measure ULA, sellers facing the mansion tax can potentially mitigate its impact by adopting the DST strategy. By deferring the capital gains tax, sellers can potentially offset the impact of the mansion tax and increase their net proceeds from the sale. As a result, the DST can be a significant game-changer in the wake of Measure ULA.
Your Role as a Broker
As a luxury real estate agent or commercial real estate broker, understanding and presenting this strategy to your clients could be key to winning more listings and serving your clients more effectively. Its not what you can sell their property for, its what they will net at closing. This includes your fee, tax and closing costs. With Measure ULA creating a new tax challenge, the DST can be a powerful solution that helps your clients navigate this new financial landscape and maximize their profits.
Navigating this new world of Measure ULA might seem challenging, but with the right tools and understanding, you can turn this challenge into an opportunity. The DST represents a promising solution for your clients and an opportunity for you, as a broker, to deliver exceptional value and results in a rapidly evolving market.
Please note: This blog post is intended as a guide only and should not replace professional financial or tax advice. Always recommend that your clients consult with a CPA or attorney to understand the implications of their exit for their specific situation.
The advent of the mansion tax underscores the importance of adaptability and forward-thinking in the world of real estate. By embracing strategies such as the Deferred Sales Trust, we can navigate these changes and continue to deliver successful outcomes for our clients. The landscape might be changing, but our capacity for innovation and resilience is more potent than ever.
Learn more about the DST at Capital Gains Tax Solutions Youtube Channel here.
About the Author:
Brett Swarts is considered one of the most well-rounded Capital Gains Tax Deferral Experts and informative speakers in the U.S. He is the Founder of Capital Gains Tax Solutions, is a Deferred Sales Trust Trustee, host of the Capital Gains Tax Solutions podcast.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.