Reducing the Price by Amount of Commission to Save on Transfer and Property Taxes : A Strategy Worth Examining—Carefully

Recent changes in California law have brought renewed attention to an issue that, until recently, was largely treated as deal mechanics rather than tax planning: who pays real estate brokerage commissions. Beginning January 1, 2025, California Civil Code § 1670.50 confirms that a buyer may pay its own broker directly, and there is nothing improper about a buyer also paying the seller’s broker. Because transfer taxes and property taxes are often tied to the reported purchase price, that flexibility has prompted market participants to ask whether a reduced stated price—paired with buyer-paid commissions—may reduce transfer taxes and future property taxes. The potential savings can be meaningful, but the approach raises unresolved legal, documentation, and audit-risk questions—particularly when the structure appears designed to cross (or avoid) a tax threshold.

Transfer Taxes and the Concept of “Consideration”
Assume a commercial property in the City of Los Angeles sells for $10,000,000, with a total brokerage commission of $500,000.
At a $10,000,000 price, the transfer-related taxes would generally total approximately $456,000, consisting of:

• $400,000 in City of Los Angeles ULA tax (4% for transactions in the applicable tier),
• $45,000 in City of Los Angeles transfer tax ($4.50 per $1,000), and
• $11,000 in Los Angeles County documentary transfer tax ($1.10 per $1,000).

Assume instead that the buyer pays the $500,000 brokerage commission directly and the parties reduce the stated price to $9,500,000. At that price, the transfer-related taxes would be approximately $433,200, producing an apparent reduction of approximately $22,800.

At present, however, there is no case law, published agency guidance, or established administrative practice confirming how taxing authorities will treat transactions structured in this manner. California Revenue and Taxation Code § 11911 defines “consideration” broadly to include the value of property transferred and “any other consideration” given for the transfer. Brokerage commissions historically were paid by sellers as part of the stated price, and there is no clear statutory or regulatory authority confirming that commissions paid by a buyer will always be excluded from consideration for transfer tax purposes. Whether taxing authorities respect the reduced price may depend on structure, documentation, and whether the stated price reflects the parties’ bona fide economic agreement rather than a late-stage tax adjustment.

ULA Threshold Sensitivity
This strategy is most often considered in transactions near ULA thresholds—particularly the $5 million and $10 million tiers. Structuring a transaction to fall below a ULA threshold may be perceived by the City of Los Angeles as aggressive tax planning, especially where the price reduction appears designed primarily to avoid the tax rather than to reflect actual economics. While there is no explicit anti-avoidance rule addressing commission restructuring, the ULA ordinance contains broad language authorizing the City to examine the substance of transactions. As a practical matter, the closer the deal is to a ULA breakpoint—and the later in the transaction the restructure appears—the more likely it is to be viewed as threshold gaming rather than legitimate economics.

Property Tax Reassessment: Assumption Versus Practice
Upon a change in ownership, the county assessor establishes a new base-year value, typically starting with the reported purchase price. In theory, reducing the price from $10,000,000 to $9,500,000 lowers the assessed value and produces annual savings of approximately $5,500 at a 1.1% effective tax rate. However, this outcome should not be assumed since the assessor may still look past form to substance and evaluate whether the reported price reflects the property’s true open-market value.  Revenue and Taxation Code § 110 generally presumes the purchase price reflects full cash value unless rebutted by a preponderance of the evidence, which gives assessors room to test whether the stated price reflects true open-market value.

Los Angeles County has not issued public guidance confirming that buyer-paid commissions will be excluded from base-year value where the stated price is reduced. Assessors may consider all facts bearing on value, including whether the reported price reflects full consideration. The long-term property tax benefit—often cited as the primary economic driver of this strategy—remains untested in practice.

Practical Constraints: Financing, Allocation, and Documentation
Financing is another important variable. Most lenders determine loan proceeds based on loan-to-value or loan-to-purchase-price ratios, often using the lower of the two. A reduced stated price may reduce the maximum loan amount. Lenders generally treat brokerage commissions as transaction costs rather than as part of the value of the real estate, and even if commissions are paid by the buyer, they may not be financeable. Buyers should evaluate whether the reduced tax burden offsets any increased cash requirement at closing.

Parties should also consider who benefits from any savings. Transfer tax savings are a one-time event typically borne by the seller, while property tax savings accrue to the buyer over the holding period. If the buyer assumes commission obligations customarily paid by the seller, allocation of any resulting tax benefit becomes a negotiated issue. This should be addressed early—ideally in the letter of intent—so expectations match the economics reflected in the stated purchase price.

Brokers may resist delayed or non-escrowed payment of their commission since payment by the buyer may be less certain. Escrow or title companies may be reluctant to administer non-standard payment structures or reporting. Parties should confirm early whether escrow will process buyer-paid commissions and how those payments will be reflected in closing statements and tax filings.

If commissions are paid by the buyer, parties should expect scrutiny regarding whether those payments are truly independent obligations rather than disguised price adjustments. The cleanest version of this structure is one where the buyer’s commission obligations are documented clearly in brokerage agreements, escrow instructions, and closing statements, and the reduced price reads as a negotiated economic term—not a post-hoc tax-driven revision.

A Cautious Conclusion
Reducing the stated price in connection with buyer-paid commissions is a developing strategy, not an established one. It may reduce transfer taxes and property taxes, but the risk-adjusted outcome is uncertain. Until taxing authorities issue guidance or courts address the issue, parties should view this as a negotiated business strategy with meaningful audit and implementation risk—not a reliable tax outcome. Done early and documented cleanly, this can be a legitimate pricing structure; done late or near a threshold, it is more likely to be viewed as an audit invitation.

Author’s Note: This newsletter is general information and does not constitute legal or tax advice. Transfer tax rules, ULA thresholds, and property tax treatment can change, and outcomes depend on deal-specific facts. Parties should consult their own legal and tax advisors.