In 2023, significant changes occurred in the City of Los Angeles with the passing of Initiative Ordinance ULA. This ordinance imposed additional transfer taxes on commercial and residential real property sales exceeding $5 million. In response, some sellers of high-value properties have attempted to adjust their sales prices to avoid the consequences of this ordinance.
Understanding Full Value
Before we delve into examples of price manipulation, let's clarify the fundamentals. Transfer taxes and property taxes in California are based on the full cash value of the property. This value is essentially what the property would sell for in an open market. It's important to recognize that real property includes buildings, structures, and fixtures, while nontaxable tangible personal property includes household goods and personal effects.
Examples of Price Manipulation Attempts
1. Personal Property Items: Sellers sometimes try to adjust the sales price by allocating a portion of it to nontaxable personal property. Buyers may agree to this arrangement. However, this approach can be tricky to navigate. Certain items, like built-in appliances, are considered part of the real property. If you're dealing with legitimate sales of personal property, ensure they are accompanied by a bill of sale and, if possible, the original sales receipt.
2. Transfer of Legal Entity: When real property is held within a legal entity, transferring the entity itself rather than the deed to the property usually won't help in avoiding property taxes or sales tax.
3. Commissions: Some may attempt to reduce the purchase price by "waiving" commissions or paying them separately from the purchase price. Be cautious, though, as commissions are often seen as part of the property's value. Furthermore, buyers may need to explain any "special terms" on a Preliminary Change of Ownership form.
4. Items Not Paid out of Escrow: Trying to pass expenses out of escrow can be risky and is likely to be ineffective if discovered.
Addressing Tax Concerns
As real estate professionals, your primary role is to help clients achieve their desired sales or purchase price. However, when it comes to adjusting prices for specific financial or tax outcomes, we strongly advise clients to consult with an appropriate professional, such as a CPA or tax attorney. Even mutually agreed-upon price alterations could lead to unintended consequences, including costly penalties and attorney fees.
Remember, at AIDE, our mission is to support you, providing valuable information and education. Stay informed, stay professional, and always prioritize your clients' best interests.
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