By Christopher Miller, MBA
Specialized Wealth Management
Each year, California seems to make the real estate business much more difficult. The state’s hostility to employers, landlords and investors is clear. It seems like California wants us gone. Maybe we should start listening.
Los Angeles Eviction Moratorium and Expansion of Rent Control
On January 20th, the Los Angeles City Council formalized its decision to end the COVID eviction moratorium on January 31 – but also issued a slew of new eviction and rent increase limitations: including expanding these rules to single family residences and condominiums. Then on January 24th, the city council voted to extend the eviction moratorium by an additional two months to the end of March, 2023. Since this has been extended repeatedly since the pandemic’s start 3 years ago, will March really be the end of it?
The Spread of Rent Control Statewide After it Was Resoundingly Voted Down in an Election
In 2019, I wrote two articles about the spread of rent control in California. In them, I noted that Proposition 10 – which sought to expand these regulations in the state – was soundly defeated on the ballot 59% to 41%. Since California voters overwhelmingly stated they did not want rent control, the state responded by instituting statewide rent controlsthat limit annual rent increases and restrict evictions to “just cause only.” The state is so hostile to landlords that it will ignore voters in order to “get” them.
The “Mansion Tax.” Surprise! It Applies to All Real Estate Over $10 million
Ballot measure ULA in Los Angeles County last November promised to “soak the fat cats” with a “Mansion Tax” on sales of property over $5 million. After the measure passed, the real effects became clearer: This is not a tax on “mansions” but a tax on all real estate sales above that amount. Properties selling for greater than $5 million will pay a 4% tax and those valued over $10 million will pay 5.5%. The existing Los Angeles City and County transfer tax, of course, will remain in place so sellers can add 0.56% to those numbers.
It’s easier to get citizens to vote for something if it doesn’t apply to them, but this law doesn’t include provisions for inflation or the eventual rise of real estate values. According to realtor.com, the median home sales price in Los Angeles County from 2022 was $824,900. Between 2000 to 2022, home values in the county rose at 6.25% annually. If this trend continues, the average home will be worth $5 million in September of 2051. Could you imagine paying a tax of 4.5% when you sell an average house? Your grandkids will!
The Proposed “Wealth Tax” Of 1% Annually Above $50 Million
In 2020, the California State Senate declined to pass a statewide “wealth tax” but Assemblyman Alex Lee introduced a new bill in mid-January this year that would impose an annual 1.5% tax on “worldwide net worth.” Once again, the bill’s headline sells going after the very rich while the fine print in the bill attacks much “smaller fish.” This tax will start at 1% on a net worth over $50 million. Once again, time will make this tax affect a lot of people: If you currently own an $8.1 million real estate portfolio, or are working to build one, it could be worth $50,000,000 in just 30 years if we see that same 6.25% annual growth. Remember that hamburgers used to cost 20 cents, so what will 1% of $50 million be like 30 years from now? The same as 1% of an equivalent amount of money today. 1% of the previously mentioned $8.1 million is $81,000. Can you imagine paying an additional $81,000 of taxes every year? Real estate investors could be faced with just that in 30 years.
Other States Encourage Growth While California Discourages it
Other states are actively courting growth and seeking to attract the ingredients to drive it. To create economic growth, a region needs capital and investors to spend that capital building companies and generating jobs – and then creating places for those employees to eat, shop and live. States like Texas and Florida are actively seeking ways to attract wealthy investors, developers and employers. Based on California’s actions, on the other hand, it is hard to believe that they are not intentionally trying to drive these positive attributes out of the state.
Tax discourages, incentives encourage.
The field of economics teaches us that raising the price of something will result in less of that product getting sold. Higher minimum wages make labor more expensive and lead to fewer employees. Raising the price of a toothbrush will result in fewer sold toothbrushes. When the government wants to discourage an action, as with smoking cigarettes, it will impose a tax on that action. If the government wants to encourage an action, such as having children, they will “pay” citizens with a tax break.
What is California seeking to do with these new regulations? If the state wants to discourage wealthy investors, (or those who aspire to be so), from living here or dissuade landlords from remaining in the housing business – perhaps we should listen. I know that Texas and Florida will be happy to have us.
Christopher Miller is a Managing Director with Specialized Wealth Management and specializes in tax-advantaged investments including 1031 replacement properties. Chris’ real estate experience includes work in commercial appraisal, in institutional acquisitions for a national real estate syndicator and as an advisor helping clients through over five hundred 1031 Exchanges. Chris has been featured as an expert in several industry publications and on television and earned an undergraduate business degree and an MBA emphasizing Real Estate Finance from the University of Southern California. Chris began his real estate career in 1998. Call him toll-free at (877) 313 – 1868.
Securities offered through Emerson Equity LLC, member FINRA/SIPC. Emerson Equity LLC and Specialized Wealth Management are not affiliated. All investing involves risk. Always discuss potential investments with your tax and/or investment professional prior to investing. Hypothetical scenarios herein are provided to illustrate mathematical principals only, and they are not a promise of performance. There can be no assurance that any investment strategy will achieve its objectives.