Selling a luxury property in Los Angeles is an art, especially when that property is valued at $10 million or more. Yet, while many high-net-worth homeowners focus on maximizing sale price, they often underestimate the financial impact of capital gains taxes—a pitfall that can significantly erode your net proceeds.
If you’re considering listing your home in exclusive enclaves like The Bird Streets, Trousdale Estates, or Sunset Plaza, understanding how to sidestep capital gains traps is just as critical as staging your property for potential buyers.
Capital Gains Tax: The Luxury Seller’s Challenge
Capital gains tax is levied on the profit made from selling an asset—such as a luxury home—when it’s sold for more than you paid for it. With the dramatic property appreciation seen across Los Angeles in neighborhoods like Malibu and Hollywood Hills, many sellers are facing multi-million-dollar tax bills.
- Federal capital gains tax: Up to 20% for long-term holdings.
- California state capital gains tax: Up to 13.3%.
- NIIT (Net Investment Income Tax): 3.8% additional for high-income earners.
Example: Selling a $13 million estate in Hancock Park - Larchmont Village that was purchased for $6 million may create a $7 million capital gain, subjecting you to a potential tax burden of over $2.5 million without tax mitigation planning.
Common Pitfalls High-End Sellers Must Avoid
1. Failing to Leverage the Primary Residence Exclusion
Luxury homeowners sometimes overlook the $250,000 (single) or $500,000 (married) exclusion provided under Section 121 of the IRS code for primary residences. Although modest for multimillion-dollar properties, this exclusion can reduce your taxable gain when selling your personal residence.
Tip: If you’ve lived in your luxury estate in Beverly Hills Flats for at least two of the past five years, you may qualify.
Learn more about the exclusive lifestyle in Beverly Hills Flats.
2. Ignoring the 1031 Exchange Opportunity
A costly mistake many high-net-worth individuals make is failing to consider a 1031 Exchange, which allows you to defer capital gains taxes by reinvesting the proceeds from your sale into another qualifying investment property.
This strategy is especially popular for owners of investment properties or homes converted into rentals.
Example: A seller in Encino could use a 1031 Exchange to roll the proceeds from a $10 million sale into a luxury income-producing property in Bel Air.
Explore luxury investment properties in Bel Air.
⚠️ Disclaimer: 1031 Exchanges are subject to strict IRS timelines and criteria. Always consult a CPA or tax attorney before pursuing this route.
3. Overlooking Charitable Remainder Trusts (CRT)
A Charitable Remainder Trust allows sellers to donate a property into a trust, sell it tax-deferred within the trust, and receive lifetime income while contributing to a charitable cause. This can also reduce taxable estate value and yield income tax deductions.
However, it’s an advanced strategy best suited for sellers with philanthropic goals.
⚠️ Note: This requires close collaboration with an estate planning attorney and financial advisor.
4. Missing Opportunity Zone Investments
For sellers comfortable with longer investment horizons, reinvesting in a Qualified Opportunity Fund can defer or reduce capital gains taxes while diversifying your portfolio.
IRS Opportunity Zone guidance: https://www.irs.gov/credits-deductions/businesses/opportunity-zones.
Learn about areas with strong rental potential, such as West Hollywood, that may complement your investment goals.
5. Relying on Generic Tax Advice
One of the most common pitfalls is receiving general advice that doesn’t account for your specific property type, ownership structure, or long-term financial goals.
- Out-of-state sellers: May have additional tax withholdings (e.g., California FIRPTA rules).
- International owners: Subject to foreign investment tax policies.
- Estate planning concerns: If your property is part of a trust or inherited estate, custom strategies apply.
Scenario: Dodging Capital Gains Pitfalls
Imagine a seller offloading a $17 million architectural estate in The Bird Streets:
- Without consulting a CPA or attorney, they fail to convert it into a rental or utilize a 1031 Exchange.
- They also overlook the opportunity to establish a CRT or reinvest in Opportunity Zones.
Result: They lose out on millions in potential tax deferral or reduction.
Compare this to a seller who implements a 1031 Exchange and leverages their primary residence exclusion—resulting in far greater retained wealth.
Curious about luxury market trends in The Bird Streets? Read our Bird Streets neighborhood guide.
Key Takeaway: Your Team Matters
The best way to avoid capital gains pitfalls is to:
- Consult a CPA who specializes in real estate.
- Hire a tax attorney familiar with California tax regulations.
- Work with a wealth advisor to integrate real estate decisions into broader financial plans.
Final Thoughts
Avoiding capital gains pitfalls isn’t just about understanding the tax code; it’s about working proactively with professionals to create a bespoke strategy. For those selling $10M+ homes in Los Angeles’ elite neighborhoods, protecting your wealth is as important as commanding top dollar.
Disclaimer
I am not an attorney, CPA, or financial advisor. This content is for informational purposes only and does not provide legal, financial, or tax advice. I do not assist with creating trusts, converting properties into rentals, or managing 1031 Exchanges. Always consult qualified professionals before making tax-related decisions.
