NYC Real Estate Taxes
Selling New York City real estate can be a very complicated process—just as complicted as purchasing New York City real estate—particularly from the perspective of taxes and exemptions. The following is a list of various potential tax obligations and exemptions that sellers should be aware of, in case any one of these various scenarios apply to them, along with a brief summary of each.
Investment Property Taxes
Many people find investing in real estate i.e. purchasing property for the sole purpose of investment, to be extremely advantageous. One of the most significant pluses is the fact that all mortgage interest paid on investment properties is fully deductible. There are some down sides, however, the largest one being that the loan origination fees and points he or she might have paid in order to lower the loan’s interest rate can’t be deducted.
The interest on loans that were used to purchase, construct, or improve upon the property are deductible up to $500,000.00 for single tax payers, and $1,000,000.00 for married couples. The interest accrued on home equity loans can be deducted up to $50,000.00 for individuals and $100,000.00 for married couples.
Capital Gains are the profits that occur as a result of the difference between selling and purchasing price, on which sellers of a primary residence are taxed. The amount can vary based on a number of considerations, such as whether or not someone is a resident of the United States, and the current condition of the property. Deductions from Capital Gains include the fees for the loan application, closing costs, and the points that were paid for the loan to get a lower interest rate for the mortgage.
Generally, however, the taxes are 15% for residents of the United States who live in New York State. In addition, approximately 10% is added for city taxes. Some individuals will be able to qualify for not having to pay Capital Gains. If the house was the seller’s primary residence for 2 (at least) of the last 5 years, the Capital Gain can’t be over $250,000.00 for a single person or $500,000.00 for a married couple.
Capital Gains are reported on Schedule D of the IRS form. If the property has been owned for 1 year or less than 1 year, the owner reports it as a short-term Capital Gain. If he or she has owned it for longer than 1 year, it is a long-term Capital Gain. It is most advantageous for an owner to live in his or her residence for more than two years before selling it, because if they do, they will have more time to reinvest the Capital Gain from their home’s sale.
Taxes for Non-US Residents
When a non-US resident sells a property in New York City that he or she has owned for over a year, he or she must pay 30% of the price of the sale in Federal and State taxes. In 1980, the US government instated the Foreign Investment in Real Property Tax Act, which withholds these taxes from the sale’s proceeds in order to ensure that non-US residents pay the taxes. New York State withholds 6.85% for taxes, and the IRS withholds an additional 10%. Upon the occasion of the real estate being sold, the buyer or the seller has to file a Statement of Withholding on Disposition by Foreign Persons of United States Real Property Interests form with the IRS. In order to avoid these taxes, a foreign investor can creates a Limited Liability Company, or LLC, in order to purchase and sell real estate in the City of New York.
Limited Liability Company (LLC)
An LLC is a company formed between people who want to form a partnership in order to accomplish a specific project, or a few specific projects, without necessarily wanting to tie themselves to one another permanently or more lastingly. Purchasing a property is a perfect example of a situation where multiple partners may want to join together for one specific purpose. LLCs provide their partners with added protections and benefits, which makes it even more enticing to many people. One major advantage is that when the property is sold, the partners can, if so desired, transfer the property’s title to the LLC, which allows them to avoid taxes on the sale. After purchasing a new piece of property, the partners transfer the title to one of the partners so that it is in his or her name.
Tax Advantages to Having a Mortgage
When you have a mortgage, you receive tax advantages. All interest paid is tax deductible and, further, reduces the amount of income that is taxed. One is advised to consult with an accountant or professional tax consultant, however, because there are limits on how much interest one is allowed to claim on taxes.
NYC Mansion Tax Rates
- 1% for purchases of $1,000,000 to $1,999,999
- 1.25% for purchase of $2,000,000 to $2,999,999
- 1.5% for purchases of $3,000,000 to $4,999,999
- 2.25% for purchases of $5,000,000 to $9,999,999
- 3.25% for purchases of $10,000,000 to $14,999,999
- 3.5% for purchases of $15,000,000 to $19,999,999
- 3.75% for purchases of $20,000,000 to $24,999,999
- 3.90% for purchases of $25,000,000 and above
NYC Transfer Taxes
- Condos, Coops, 1-3 Family Houses: $500k or less is 1%
- Condos, Coops, 1-3 Family Houses: Greater than $500k is 1.425%
- All other property types: $500k or less is 1.425%
- All other property types: Greater than $500k is 2.625%
NYS Transfer Taxes
- Condos, Coops, 1-3 Family Houses: Less than $3million 0.40%
- Condos, Coops, 1-3 Family Houses: $3million or more 0.65%
- All other property types: Less than $2million 0.40%
- All other property types: Greater than $2million 0.65%
There are a number of situations in which tax exemptions are possible. If someone owns a home as his or her primary residence for at least two years but then has to sell due to an unavoidable circumstance that makes relocation necessary, such as a new job or health reasons (including when a person must sell his or her home in order to raise money for the medical expenses), a tax exemption is possible. In the case of health reasons, it’s advisable but not necessary for someone to keep a physician’s letter on hand, that describes personal information regarding the health problem, in case one is audited at some point.
One can qualify for a tax exemption due to “unforeseen circumstances.” The IRS defines “unforeseen circumstances” as “the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home.” Some examples include the ones listed above, as well as war, terrorism, natural disasters, separation or divorce, death, multiple births from a single pregnancy, and a change in employment status, leaving the owner unable to pay for his or her living expenses. IRS Publication 523 describes “unforeseen circumstances” in great detail.
As far as Capital Gain goes, as of 2003, there is a special provision provided to people enlisted in the army, navy, and National Guard that states that people in the military do not need to have lived in their home for two years. Additionally, the 5 years one has to have owned the property for has been extended to 10, which allows people to fulfill their military obligations.
Another way to avoid Capital Gains is for one to buy a “like-kind” property, i.e. a home of equal or greater value than the property that was sold, usually within 180 days of selling the previous home. If one pursues this option, forms must be filed with the IRS to make them aware of the purchase. The property must be located within the continental US.
Consulting an accountant on which, if any, of these exemptions you might apply for, is key.