Groups File Lawsuit Challenging the City of Los Angeles’ Transfer Tax Increase

It’s a new year and a new tax in the City of Los Angeles! As those with real estate holdings prepare for the new year, including dealing with the ramifications of the immense transfer tax increase set to go into effect on April 1, 2023, impacted taxpayers should keep a close eye on a recently filed legal challenge seeking to invalidate the new tax.

The Howard Jarvis Taxpayers Association and the Apartment Association of Greater Los Angeles filed a complaint in Los Angeles County Superior Court on December 22, arguing that transfer taxes that are “special taxes” are prohibited for all local governments in California, including charter cities.

As reported in our prior update, special taxes in California are taxes in which the tax revenue is dedicated to specific purposes, in contrast to a general tax, where the tax revenue is deposited into the city or county’s general fund. Measure ULA is a special tax as it designates the new tax revenue to be deposited into the “House LA Fund,” which, by the measure’s language, is to be used exclusively to prevent homelessness and fund affordable housing.

The recently filed complaint points to the language in California Constitution Article XIII A, section 4, which prohibits transfer taxes on sales of real property. That provision states:

“Cities, Counties and special districts, by a two-thirds vote of the qualified electors of such district, may impose special taxes on such district, except ad valorem taxes on real property or a transaction tax or sales tax on the sale of real property within such City, County or special district.”

The complaint acknowledges that California case law has permitted real estate transfer taxes since 1990, but with the caveat that courts have only upheld general transfer taxes, not special transfer taxes. Thus, the groups argue that Measure ULA is invalid as the “electorate’s initiative power is no greater than the legislative power of the City Council,” and Measure ULA proposed a special tax beyond the electorate’s authority.

This is a distinct argument from the previously reported lawsuits throughout California that challenged the validity of special tax measures passed with less than a two-thirds vote, and the courts would not be bound by those previous decisions.

Taxpayers with significant real estate holdings in the City of Los Angeles should monitor the outcome of this case, as it could potentially spare taxpayers from the considerable increase in Los Angeles’ documentary transfer tax.

If you have questions about the pending litigation, Measure ULA, or need assistance with any other tax matter, please get in touch today with our dedicated team of attorneys at Bewley, Lassleben & Miller, LLP.