The luxury real estate market in Los Angeles is thriving, with elite buyers seeking multi-million-dollar estates in some of the world’s most exclusive neighborhoods like Bel Air, Malibu, and Hollywood Hills. If you’re preparing to sell a $10 million+ home, the excitement of closing a record-breaking sale can be quickly tempered by one unavoidable reality—capital gains taxes.
For owners of ultra-luxury homes in Los Angeles, capital gains exposure could equate to millions of dollars. However, with proper planning, there are several legal strategies to reduce, defer, or offset these taxes while still enjoying the rewards of your high-value transaction.
Capital Gains Tax: A Closer Look for LA Luxury Sellers
Selling a home you’ve held for years can result in significant appreciation—and substantial capital gains. The IRS applies long-term capital gains rates for properties owned for more than one year.
- Federal long-term capital gains rate: Up to 20%.
- California state tax: Up to 13.3%.
- Net Investment Income Tax (NIIT): Additional 3.8% for those in high-income brackets.
For example, if you sell a $14 million estate in Malibu that you purchased for $6 million, you’re potentially looking at a $8 million taxable gain, which could result in a tax bill of more than $3 million without proper planning.
Tax-Smart Strategies for Luxury Sellers
1. Optimize the Primary Residence Exclusion
Although the IRC Section 121 exclusion is modest compared to the scale of ultra-luxury sales, it’s still worth claiming. Sellers who have used the home as their primary residence for at least two of the past five years may exclude:
- $250,000 (single).
- $500,000 (married filing jointly) from their capital gains.
While this won’t eliminate capital gains on a $10M+ property, it serves as a valuable first step in layered tax planning.
For more on living in sought-after communities, visit our Malibu guide.
2. Defer Taxes with a 1031 Exchange
For sellers with investment or rental properties, a 1031 Exchange can be one of the most powerful tools to defer capital gains taxes. By reinvesting into another qualifying property of equal or greater value, you can postpone paying taxes on the gain.
- Example: Selling a $12 million rental in West Hollywood and exchanging into a $15 million luxury rental in Beverly Hills Flats.
Learn more about luxury rental markets in West Hollywood and Beverly Hills Flats.
⚠️ Reminder: 1031 Exchanges are for investment properties only and follow strict IRS guidelines regarding timelines and identification rules.
3. Consider a Charitable Remainder Trust (CRT)
Sellers with philanthropic goals may consider using a Charitable Remainder Trust (CRT) to:
- Defer capital gains taxes.
- Receive income from the trust over time.
- Gain charitable contribution deductions.
A CRT can be particularly beneficial for sellers looking to balance tax savings with charitable giving.
⚠️ Important: CRTs require professional structuring and are not suitable for every situation.
4. Opportunity Zones: A Niche but Effective Tool
Qualified Opportunity Zone investments may allow you to defer or reduce capital gains by reinvesting proceeds into government-designated areas.
While not ideal for all ultra-luxury sellers, Opportunity Zones could complement broader tax planning efforts depending on your long-term investment goals.
IRS Opportunity Zone guidelines: https://www.irs.gov/credits-deductions/businesses/opportunity-zones.
5. Convert to Rental + 1031 Combo
In certain cases, converting your primary residence into a rental property for two years prior to sale can make you eligible for a 1031 Exchange, giving you more flexibility and allowing capital gains deferral.
⚠️ Disclaimer: I am not a CPA or tax attorney and do not provide tax or legal advice. Always consult a qualified professional before pursuing this route.
Looking for top-performing luxury rentals in Hollywood Hills East? Explore our Hollywood Hills East neighborhood insights.
Special Considerations for LA’s Ultra-Luxury Market
- California’s aggressive tax rates: As one of the highest-tax states, California makes capital gains planning even more critical.
- Luxury inventory trends: In areas like Bel Air and Sunset Plaza, the market’s appreciation has been exponential, leading to significant taxable gains for long-time owners.
- International Sellers: Foreign owners are subject to additional rules such as FIRPTA withholding.
Dive deeper into luxury sales in Sunset Plaza.
Scenario: Layering Tax Strategies
Imagine an owner selling a $20 million estate in Trousdale Estates:
- They claim their primary residence exclusion.
- Convert the property to a rental.
- Use a 1031 Exchange into a $22 million property in Beverly Hills.
- Establish a CRT for part of the proceeds.
Result: Substantial tax deferral and potential income stream generation while benefiting from charitable contributions.
Learn more about high-end properties in Trousdale Estates here.
Why Your Advisory Team Matters
Capital gains strategies must be customized, not cookie-cutter. Sellers should work with:
- A real estate tax specialist CPA.
- A trust and estate attorney familiar with luxury assets.
- A financial advisor with ultra-high-net-worth experience.
Conclusion
Los Angeles luxury homeowners who sell for $10 million or more face both incredible opportunities and significant tax challenges. Fortunately, proactive capital gains strategies such as 1031 Exchanges, CRTs, Opportunity Zone investments, and primary residence exclusions can preserve more of your hard-earned wealth.
Disclaimer
I am not an attorney or CPA. This article is for informational purposes only and should not be considered legal, tax, or financial advice. I do not offer services such as converting properties into rentals, creating trusts, or executing 1031 Exchanges. Please consult licensed professionals regarding your specific situation.
