Sales of luxury homes in Los Angeles have fallen 26.6% from earlier this year following the implementation of a new ‘mansion tax’ affecting properties costing more than $5 million. In response to this slow, the owners of high-end homes have begun to rent out their properties, with listings as high as $150,000 per month. The rentals are marketed as holiday villas and event venues.

LA’s new ‘mansion tax’ took effect as of April 1. The tax affects all home sales between $5 million and $12 million. Homes between $5 million and $10 million are taxed at 4% of the sale price, and homes between $10 million and $12 million are taxed at 5.5%. In the first month following the tax’s initiation, sales of luxury homes almost completely stalled. In the prior month, 126 such homes were sold, but only two sales occurred in April. When the tax took effect, 457 listings for luxury homes were posted in Los Angeles.

Approved by LA votes in November of 2022, the tax was expected to raise between $600 million annually and $1.1 billion annually. The money is earmarked for the LA area’s affordable housing and tenant assistance programs.

As of September 2023, luxury home sales had dropped 26.6% compared to the previous twelve months. The luxury property rental market has exploded. Patrick Michael, founder of LA Estate Rentals, told Bloomberg that luxury homeowners are in ‘Panic mode,’ as $3 billion worth of luxury mansions have flooded the rental market since April.=

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Property sales continue to take place, and homes are still being listed. One such home in Holmby Hills is a 5-bedroom mansion with a 5-bedroom guest house, with 19 bathrooms and 20 garage parking spaces between them. The home’s spa, private gym, art deco bar, home cinema, swimming pool, tennis court, and grand pavilion rest upon roughly half an acre of landscaped lawn. If the $85 million luxury property had sold before April 1, the tax would not have applied, but now the city of LA will take $4.6 million from its eventual sale.

Another lavish home in Santa Monica boasts a spa, theater, indoor basketball court, library, and close access to the Riviera Country Club. Its $69 million listing represents an eventual $3.8 million tax for the city of LA.

However, many properties like these can more often be found for rent now. A comparable property in the Trousdale neighborhood has nine bedrooms, a tennis court, a pool, and a grand marble entry. Those looking for a luxury getaway can rent the property for $65 thousand per month.

How long these trends hold remains challenging to predict. The city’s estimate of $600 million to $1.1 billion revenue in revenue may still prove true, mainly if the inundated rental market makes it difficult for the owners of luxury homes to turn the profits they hope for. Some properties for rent now may turn, however grudgingly, back toward sales if there are not a sufficient number of wealthy rentals on the market.