Homeowners, Realty Groups Sue Over Transfer Tax : Budget: Measure that was passed by the City Council in May quadrupled existing fees and is expected to raise $52.7 million a year. Critics say that it places a burden on home sellers and is an effort to undo Proposition 13.

Calling a recently imposed real estate transfer tax illegal, a coalition of homeowners and real estate interests filed a lawsuit against the city of Los Angeles Tuesday to overturn the new fee.

The tax, passed by City Council on May 31, was an eleventh-hour device to balance the city’s budget. It quadruples existing fess and is expected to raise $52.7 million a year.

“It sent a message to other city governments that said if you can’t manage your finances you can get yourself out of a jam by putting the burden on home sellers,” Chuck Lamb, a Northridge real estate businessman and president-elect of the California Assn. of Realtors, said at a news conference at the Los Angeles Press Club.

The suit was filed in Los Angeles Superior Court by three Los Angeles homeowners who recently sold their homes and by the California Assn. of Realtors, the Pacific Legal Foundation, the Los Angeles Board of Realtors, the San Fernando Valley Board of Realtors and the Howard Jarvis Taxpayers Assn.

The tax, which adds $4.50 to every $1,000 of sales price--about $900 to the sale of a $200,000 home--went into effect July 3. It is imposed on top of an existing Los Angeles County transfer tax of $1.10 per $1,000 of sale price.

Joel Fox, president of the Jarvis group, said the new tax violates Proposition 13, the 1978 voter initiative that limited property taxes. “The transfer tax is more than an end run around Proposition 13, it’s an attempt to crash through,” he said.

Because Proposition 13 amended the state Constitution to forbid cities and counties to add new transaction taxes on real estate sales, said John Groen, an attorney with the Pacific Legal Foundation, the tax is a “clear violation of the California Constitution.”

“Our goal ultimately is to attempt to have the legality of the transfer tax put before the California Supreme Court,” Groen said.

Last year, a transfer tax imposed by Oakland was upheld by the 1st District Court of Appeal, Groen said. “That case created the loophole the city of Los Angeles is trying to take advantage of. A successful claim here could help close the loophole and restore the integrity of Proposition 13.”

Reacting to the suit, City Administrative Officer Keith Comrie said, “We think we are on firm ground” because of the Oakland case. “We think it’s a modest amount, less than one-half of 1% of a sale, versus a (real estate) commission of 6%,” he added. “It’s typical of this constant push and shove to try to keep services at a decent level, and interest groups not wanting to pay any proportional share of taxes.”

Councilman Zev Yaroslavsky, who championed the real estate tax, said: “We will do our best to defend this tax base. We cannot run a city without the ability to tax. If we’re expected to provide services and not given the ability to raise revenue, you might as well shut down local government.”

This summer, Santa Monica, Torrance and Culver City also increased transfer tax fees. Lamb said the suit was necessary because he feared that the tax would become a widespread tool used by cities as “a blank check to raise additional revenues.”

Jonathan Woolf, a homeowner who joined the suit, said he feels the tax is an unfair burden. The owner of a film equipment rental business, Woolf said the home he sold in Sherman Oaks closed escrow after the tax passed, and cost him $1,270. “If I’d known about this tax I would have increased the sales price,” he said.