Selling a luxury home in Los Angeles is always an exciting milestone, but for those listing properties priced at $10 million and above, the thrill of closing a high-value deal often comes with a hefty side note: capital gains taxes. For high-net-worth sellers in areas like Beverly Hills, Bel Air, or Malibu, understanding how to legally minimize capital gains exposure is a crucial part of your financial planning.
With California’s combined state and federal capital gains taxes reaching upward of 37.1% for high-income earners, sellers of ultra-luxury homes need more than just a qualified buyer—they need a tax strategy. While this article outlines helpful tools and tactics to consider, you should always consult with a licensed tax attorney or CPA before implementing any capital gains reduction strategy.
What is Capital Gains Tax and Why Does It Matter for $10M+ Properties?
Capital gains taxes apply when you sell a property for more than you originally paid for it. For luxury sellers in Los Angeles’ prime markets—such as the Hollywood Hills, West Hollywood, or Santa Monica—the tax bill can be significant, especially when the property has appreciated over several years.
- Federal long-term capital gains rate: Up to 20%.
- California state capital gains tax: Up to 13.3%.
- Net Investment Income Tax (NIIT): Additional 3.8% for high earners.
For example, selling a $12 million estate in Beverly Hills that was purchased for $6 million could create a $6 million taxable gain, potentially resulting in a tax bill of $2 million or more.
Common Strategies to Minimize Capital Gains Exposure
While capital gains taxes cannot always be avoided, they can often be deferred, reduced, or offset. Below are several popular options for luxury property owners.
1. Primary Residence Exclusion (IRC Section 121)
If your luxury property has been your primary residence for at least two of the last five years, you may be eligible to exclude up to $250,000 in gains if single or $500,000 if married filing jointly.
While this exclusion is modest relative to an ultra-luxury sale, it’s still a valuable deduction, especially when layered with other strategies.
Tip: Many luxury sellers in areas like Encino or Los Feliz may use this in conjunction with other tax planning tactics to further reduce liability.
2. Convert the Property Into a Rental (Two-Year Rule)
Some homeowners strategically convert their primary residence into a rental property for at least two years to potentially qualify for a 1031 Exchange, which allows you to defer capital gains taxes when exchanging one investment property for another.
While this strategy is complex and requires planning, it is often used by high-net-worth individuals aiming to reposition wealth into other real estate assets.
⚠️ Disclaimer: This article does not provide legal or tax advice. Consult with a qualified CPA or tax attorney regarding rental property conversions or 1031 Exchanges.
3. 1031 Exchange for Investment Properties
A 1031 Exchange allows owners of investment properties to defer capital gains taxes by reinvesting proceeds into another like-kind property of equal or greater value.
For instance, selling a Malibu oceanfront rental property and rolling the proceeds into a new luxury rental in Hollywood Hills East could defer capital gains taxes indefinitely.
Learn more about high-value investment properties on our Hollywood Hills East page.
4. Opportunity Zone Funds
Luxury sellers may reduce or defer capital gains by reinvesting in qualified Opportunity Zone projects.
While these funds are typically geared toward investors seeking long-term holds in designated Opportunity Zones, certain high-net-worth individuals leverage them as part of a diversified tax planning approach.
Check out IRS guidance on Opportunity Zones here.
5. Charitable Remainder Trust (CRT)
A Charitable Remainder Trust can provide sellers with the ability to reduce or eliminate capital gains by placing the property into a trust, selling it tax-free within the trust, and receiving income from the trust during their lifetime.
This strategy also allows sellers to make significant charitable contributions while receiving income tax deductions.
⚠️ Important: Setting up a CRT is highly specialized. Consult with an experienced estate planning attorney.
⚠️ Disclaimer: I am not a CPA, financial advisor, or attorney. I do not create trusts or manage tax-related services. Always seek professional advice when considering advanced tax strategies.
Special Considerations for Los Angeles Luxury Sellers
- California State Tax Impact: Luxury sellers in Los Angeles pay among the highest state-level capital gains taxes in the country.
- Non-resident Sellers: International or out-of-state owners selling LA luxury properties may face additional tax withholding or reporting requirements.
- Inherited Properties: Capital gains on inherited luxury properties may be mitigated via a step-up in basis but require careful planning.
Hypothetical Scenario
Let’s say a homeowner sells their $15 million home in Bel Air, which they’ve held for 10 years. They:
- Use a Primary Residence Exclusion ($500,000 married).
- Convert the property into a rental for 2 years.
- Execute a 1031 Exchange into another luxury rental estate in Beverly Hills Flats.
Result: Their gains could be significantly deferred or offset by layering multiple strategies.
For more about Beverly Hills Flats’ luxury market, explore this neighborhood guide.
Consult the Experts
While this article outlines general strategies for minimizing capital gains taxes when selling a luxury home, every situation is unique. Consult with a team of experts including:
- A real estate-focused CPA.
- An experienced tax attorney.
- A financial planner familiar with ultra-high-net-worth individuals.
Final Thoughts
Selling a $10 million+ home in Los Angeles is about more than maximizing sale price—it's also about smart wealth preservation. Through proactive planning, sellers can reduce their tax liability while unlocking new opportunities to reinvest or give back.
Disclaimer
This article is intended for informational purposes only and does not constitute legal, tax, or financial advice. I am not a CPA, attorney, or financial planner. I do not assist with creating trusts, converting properties into rentals, or structuring 1031 Exchanges. Always consult with licensed professionals before making tax or legal decisions.
