For luxury homeowners in Los Angeles, selling a $10 million-plus estate in neighborhoods like Beverly Hills, Bel Air, or Malibu is a major milestone. However, such significant transactions come with a hidden challenge that many sellers overlook—capital gains taxes.
With property values soaring across Los Angeles’ most prestigious neighborhoods, the potential tax liability can cut deeply into your net proceeds. Whether you own a stunning hillside villa in Hollywood Hills East or an oceanfront compound in Malibu, understanding capital gains tax strategies is essential.
Capital Gains Basics for High-End Property Sales
Capital gains taxes apply when you sell your property for more than your adjusted basis (typically, your original purchase price plus qualifying improvements and selling expenses).
Given the appreciation seen in LA’s luxury market over the past decade, many ultra-luxury homeowners are facing multi-million-dollar tax bills on their gains.
- Federal long-term capital gains rate: Up to 20%.
- California capital gains tax: Up to 13.3%.
- NIIT: Additional 3.8% for high-net-worth individuals.
Example: Selling a $13 million property in Hancock Park – Larchmont Village that you purchased for $5 million creates an $8 million gain, potentially resulting in over $3 million in combined federal and state taxes.
Key Strategies Every Luxury Seller Should Consider
1. Take Advantage of the Primary Residence Exclusion
If the luxury home has been your primary residence for two of the last five years, you may qualify to exclude:
- $500,000 (married couples)
- $250,000 (single sellers) from taxable gains.
While small relative to the size of a $10M+ sale, this exclusion can still be a helpful reduction.
Sellers in highly walkable areas like Hancock Park – Larchmont Village often benefit from this exemption due to long-term ownership.
2. Consider Converting to a Rental & Utilizing a 1031 Exchange
By converting your property into a rental for two years, you could become eligible to complete a 1031 Exchange, allowing you to defer capital gains taxes by reinvesting into another qualifying investment property.
- Example: Converting your $12 million home in Beverly Hills Flats into a rental, then exchanging it into a $14 million income-generating property in West Hollywood.
⚠️ Disclaimer: Converting your home into a rental or executing a 1031 Exchange requires careful planning and expert guidance.
Explore high-value rental opportunities in West Hollywood.
3. Charitable Remainder Trusts (CRT) for Estate Planning & Tax Deferral
A Charitable Remainder Trust allows you to:
- Transfer ownership of the property into a trust.
- Avoid immediate capital gains taxes when the trust sells the home.
- Receive a lifetime income stream from the trust.
- Gain income tax deductions for charitable contributions.
While not for everyone, CRTs can play a role in sophisticated estate and tax planning.
⚠️ Note: This option requires legal counsel and coordination with estate planners.
4. Explore Opportunity Zone Funds
Investing in Qualified Opportunity Zones allows sellers to:
- Defer paying capital gains taxes until as late as 2026 (depending on holding period).
- Potentially reduce capital gains liability if the investment is held long-term.
This strategy is best suited for sellers who are comfortable with longer-term development or redevelopment projects in qualified zones.
IRS Opportunity Zones overview: https://www.irs.gov/credits-deductions/businesses/opportunity-zones.
Additional Tax Considerations for Los Angeles Sellers
- Out-of-state sellers: Subject to California nonresident tax withholding.
- Foreign nationals: May face FIRPTA withholding.
- Inherited properties: May benefit from a step-up in basis but require specialized advice.
For a luxury market perspective in Encino, view our Encino luxury homes guide.
Real-Life Example
A seller owns a $15 million estate in The Bird Streets:
- They qualify for the primary residence exclusion.
- They convert the property into a luxury rental and complete a 1031 Exchange.
- They invest part of the deferred gains into a CRT.
Result: Significant reduction and deferral of capital gains taxes while unlocking cash flow and tax deductions.
Learn more about The Bird Streets market here: https://www.pezziniluxuryhomes.com/the-bird-streets/.
The Importance of Your Tax Advisory Team
No two luxury home sales are the same, especially when dealing with eight-figure transactions. Every seller should consult:
- A CPA specializing in real estate transactions.
- A trust and estate attorney familiar with luxury property portfolios.
- A wealth advisor who works with ultra-high-net-worth individuals.
Closing Thoughts
Before listing your $10 million+ property in Los Angeles, make sure to approach your transaction with a holistic tax strategy. From leveraging 1031 Exchanges and CRTs to maximizing the primary residence exclusion, these steps can make a seven-figure difference.
Disclaimer
I am not a CPA or attorney, and I do not provide legal or financial advice. I do not assist with setting up trusts, managing 1031 Exchanges, or converting properties into rentals. This article is for informational purposes only. Always consult with qualified professionals before making tax-related decisions.
