Selling a $10 Million+ Home in Los Angeles? Here’s How to Reduce Your Capital Gains Tax
If you’re preparing to sell a luxury home in Los Angeles—whether it’s a $12 million estate in Beverly Hills, a $15 million oceanfront villa in Malibu, or a $10 million contemporary masterpiece in Bel Air—you’re likely focused on maximizing your return. However, many luxury homeowners overlook a major component of the process: how to effectively reduce capital gains taxes.
Capital gains taxes can take a significant bite out of your profits, especially in a high-tax environment like California. But there are advanced strategies that could help you keep more of your hard-earned wealth.
Here’s what you need to know before closing on your ultra-luxury sale.
Understanding Capital Gains Tax for Ultra-Luxury Sales
For Los Angeles luxury home sellers, capital gains taxes apply when the sale price exceeds your original purchase price plus qualifying expenses. Given the appreciation of the LA luxury market over the past decade, owners of $10 million+ properties often face millions in potential capital gains.
- Federal capital gains tax (long-term): Up to 20%.
- California state capital gains tax: Up to 13.3%.
- NIIT (Net Investment Income Tax): Additional 3.8% for high earners.
For example, selling a $14 million home in Hollywood Hills East that was purchased for $7 million can create a $7 million taxable gain. Combined federal and state taxes could eat up $2.3 million or more if no proactive steps are taken.
Top Strategies to Reduce Capital Gains When Selling a $10M+ Home
1. Leverage the Primary Residence Exclusion
If you’ve lived in the home as your primary residence for two of the past five years, you could exclude up to:
- $500,000 if married filing jointly.
- $250,000 if single.
While these numbers may seem small compared to an eight-figure sale, they still provide a meaningful reduction when layered with other strategies.
Related: Learn more about high-end residential sales on our Beverly Hills neighborhood page.
2. Consider Converting Your Home Into a Rental
Some high-net-worth individuals convert their primary residence into an investment property to open the door to a 1031 Exchange, which allows them to defer capital gains by rolling proceeds into another rental property.
By renting your luxury home for two years, you may position yourself for a future tax-deferred exchange into another high-value investment.
⚠️ Disclaimer: I am not a CPA or attorney. Please consult a licensed professional before pursuing property conversion or exchange strategies.
3. Execute a 1031 Exchange
A 1031 Exchange is a time-sensitive strategy that allows luxury property sellers to reinvest proceeds into another “like-kind” investment property and defer paying capital gains taxes.
For example, if you’re selling an investment property in West Hollywood and exchange it into a luxury multi-family rental in Santa Monica, you may defer your taxes entirely until the next sale.
IRS guidelines on 1031 Exchanges can be found here.
Explore prime investment markets like Santa Monica for potential exchanges.
4. Charitable Remainder Trusts (CRT)
Sellers looking to reduce capital gains while giving back often leverage Charitable Remainder Trusts. By transferring a property into a CRT, it can be sold by the trust without incurring capital gains taxes immediately. The seller then receives annual income from the trust for life or a fixed term.
CRT strategies can also provide significant income tax deductions and estate planning benefits.
⚠️ Important Note: CRTs are highly specialized and require coordination with estate planning professionals.
5. Opportunity Zones for High-Earners
By reinvesting proceeds into qualified Opportunity Zone Funds, sellers may defer capital gains taxes for several years and potentially reduce them based on how long they hold the investment.
This option works best for sellers who are comfortable taking on longer-term investments aligned with government-designated Opportunity Zones.
Learn more about Opportunity Zones on the IRS official site.
Special Situations for Los Angeles Sellers
- California-specific challenges: Sellers of luxury properties in Los Feliz, Encino, or Mount Olympus must plan for California’s aggressive tax environment.
- International sellers: Out-of-state or foreign owners may also face FIRPTA withholding or California nonresident taxes.
- Inherited estates: Heirs selling inherited high-value homes might qualify for a step-up in basis, reducing the taxable gain.
For market trends in high-demand areas like Malibu, visit our Malibu luxury guide.
Real-World Scenario
Let’s imagine an owner sells their $11 million home in Studio City after living there for seven years:
- They claim the $500,000 primary residence exclusion.
- They convert it into a rental and complete a 1031 Exchange into a $12 million property in Bel Air.
- They also consult an attorney to create a CRT for part of their gain.
Result: Millions in deferred or reduced capital gains.
Learn more about high-end real estate opportunities in Bel Air.
Work with Your Professional Team
Before taking action, it’s essential to:
- Consult with a tax attorney specializing in real estate transactions.
- Work closely with a real estate-savvy CPA.
- Include a financial advisor or wealth manager for broader estate planning.
Final Takeaway
Selling a luxury home worth $10 million or more in Los Angeles brings incredible opportunities—but also potential tax risks. By utilizing proven strategies such as 1031 Exchanges, CRTs, Opportunity Zones, or residence exclusions, sellers can minimize capital gains and protect their wealth.
With California’s tax rates and Los Angeles’ ultra-competitive market, proactive planning is essential.
Disclaimer
This article is for informational purposes only and is not intended as tax, legal, or financial advice. I am not a CPA, attorney, or financial advisor. I do not provide legal or tax services, such as creating trusts or converting properties into rentals. Always seek guidance from licensed professionals regarding your personal circumstances.
