Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Always consult with a qualified CPA or tax attorney regarding your unique financial situation.
When you’re preparing to sell a $10 million+ property in Los Angeles, your ROI isn’t just about the sale price—it’s about how much you keep after taxes. With federal capital gains rates as high as 20%, plus California’s 13.3% top income tax, sellers in LA can face a combined 33.3% tax on their profits.
That’s potentially millions in taxes lost—unless you know how to plan smartly.
Here are five strategies savvy luxury homeowners explore to reduce, defer, or mitigate capital gains when selling a high-value property.
💡 1. Convert to a Rental Property (Temporarily)
If you convert your personal residence into an income-producing rental before selling, you may open the door to 1031 exchange opportunities and business-related deductions.
Benefits:
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Establishes rental use, enabling certain depreciation strategies
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Creates passive income while waiting for optimal market timing
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Potential to defer gains if exchanged into another investment property
📍Example: A Bel Air homeowner leased their $12M home for two years at $50K/month before selling. They offset gains by rolling the proceeds into a commercial building through a 1031 exchange.
➡️ Learn more about converting homes in Bel Air for leasing
🔁 2. Utilize a 1031 Exchange (Investment-to-Investment Only)
A Section 1031 Exchange allows owners of investment properties to sell and reinvest proceeds into a “like-kind” property—deferring capital gains taxes entirely.
While you cannot 1031 exchange a primary residence, this works if:
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The home has been rented or held as investment
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The replacement property is also for investment
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The rules on timing (45 days to identify, 180 to close) are met
💡 Pro Tip: Many ultra-wealthy clients execute a 1031 exchange from a leased LA property into income-generating properties in Texas, Florida, or Arizona.
➡️ Explore investment-class homes available for lease in Hollywood Hills
❤️ 3. Set Up a Charitable Remainder Trust (CRT)
A Charitable Remainder Trust allows you to donate your appreciated property into a trust, receive lifetime income, and significantly reduce your capital gains exposure.
How it works:
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Property is placed into the trust before the sale
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The trust sells the property, tax-deferred
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Seller receives income for life
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Remainder goes to a charity of your choosing
Benefits:
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Defers and potentially eliminates capital gains
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Provides a steady income stream
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Offers substantial charitable tax deductions
This strategy is ideal for philanthropic sellers seeking legacy planning and tax optimization.
🏡 4. Take Advantage of the $500K Home Sale Exclusion
If the property is your primary residence, you may qualify for the IRS home sale exclusion:
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$250,000 for single filers
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$500,000 for married couples filing jointly
To qualify:
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You must have owned and lived in the property for two out of the last five years
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Cannot have used the exclusion on another property within the last two years
While this may be a modest offset for an eight-figure sale, every reduction counts—especially when paired with other strategies.
➡️ See how sellers are optimizing exits in Beverly Hills
🔒 5. Consider Installment Sales for Deferred Gain Recognition
If you’re open to flexible terms, a seller-financed installment sale allows you to spread capital gains recognition across several years, reducing your tax burden in any one year.
Benefits:
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Delays capital gains recognition
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Provides steady, interest-bearing income
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May reduce your annual income bracket
This works well with:
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Buyers who need flexible terms
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Sellers not immediately reinvesting
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Estates planning for generational transfer
Consult your CPA or financial advisor to structure this correctly with a solid promissory note and protections.
📊 A Real-World Scenario
A seller in Los Feliz listed a $10.8M architectural estate. Instead of selling outright, they:
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Converted it to a short-term rental for 18 months
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Claimed depreciation and wrote off operational expenses
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Sold it via 1031 into a multi-unit building in Austin
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Deferred over $2.9M in capital gains taxes
➡️ Explore luxury rental potential in Los Feliz
📉 Additional Tips to Reduce Tax Exposure
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Track capital improvements (Add to your cost basis!)
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Deduct selling costs (commissions, staging, legal)
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Harvest losses from underperforming investments in the same tax year
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Use opportunity zones, if reinvesting in designated areas
💼 Work With a Team—Not Just a Realtor
Reducing capital gains isn’t a one-person job. You need:
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A luxury real estate advisor
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A top-tier CPA with high-net-worth experience
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An estate planning attorney (for trusts or generational transfers)
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Potentially, a private banker or investment strategist
Selling a luxury home in LA is as much a financial transaction as it is an emotional one. Structure it wisely—and you preserve more of your wealth for your next chapter.
