NYC Real Estate Tax Guide
New York City is known for some of the highest property taxes in the country. Our guide will help you better understand the potential taxes you will face when buying, owning or selling real estate in the city.
New York City property taxes are based on a property assessment plus relevant tax rate. Each property is then broken down into classes and taxed based on the applicable rate and assessment ratio per class. When you dive deeper into the way the New York City government taxes property, the complicated tax system seems to favor certain groups, which has created much criticism of the system.
Property Tax Classes and Caps
Property taxes are calculated by the property’s taxable assessment. That number is equal to the property assessment minus any possible exemptions. The taxable assessment is then multiplied by the tax rate of the property.
- Class One – Class One properties include most residential properties that have three units or less. Class One properties also include vacant land zoned for residential use and small co-op and condominium apartment buildings. Condos in Class One must be three stories or less. Class One properties are taxed at 16.787%, with an assessment ratio of 6%.
- Class Two – Class Two properties include most residential properties that don’t meet the qualifications of Class One. These properties include residential rentals, co-ops, and condos and have a tax rate of 13.053%, with an assessment ratio of 45%.
- Class Three – Class Three properties include most utility properties and are taxed at 12.577%, with an assessment ratio of 45%.
- Class Four – Class Four real estate includes commercial and manufacturing properties in New York City, including offices and factories. Class Four properties are taxed at 10.612%, with an assessment ratio of 45%.
Property assessments in New York City are based on the market value, which refers to the amount the property would sell for under normal conditions. Each year an assessor uses several factors to determine the market value of the home, including external characteristics, the square footage, the number of rooms, the location of the home, and how other similar homes have sold in the area.
Although assessments are based on quantifiable data, they are still essentially estimates and can be contested. If a person files a grievance, the Small Claims Assessment Review then goes on the claim.
Assessment Ratio Caps
For Class One real estate, value increases are capped at 6% per year and 20% over five years. For Class Two properties, there’s an 8% cap. These caps and other provisions have provided a much-criticized gap for property taxes in New York City.
What Does It All Mean?
If the New York City property tax system seems difficult to understand to you, you’re certainly not alone. The system’s complexities are one large complaint, but it’s not the only one. Many critics also believe the way properties are taxed led to higher-income families paying lower percentages than their lower-income counterparts do.
Furthermore, the tax system is set up to essentially subsidize residential housing by taxing commercial properties at a higher rate.
It seems as though residents are receiving much better tax rates than businesses, and it’s much more favorable to rent than buying. This complicated system tends to favor higher-income families with much fewer property taxes than businesses or middle-class families.
What is the Capital Gains Tax on the Sale of a Primary Residence?
Those selling their property are taxed on the difference between the purchase and selling price that equates to the profit realized upon sale. The gain is called Capital Gains. Depending on the state of the home, the amount of Capital Gains Tax varies. The taxes also vary between residents and non-residents.
There are other charges taken into consideration when calculating the Capital Gains from the sale of a home. The closing costs point paid for the loan (usually to achieve a lower interest rate on the mortgage) and loan application fees are deducted from the capital gains. The current tax rate is 15% for US residents within New York State and city taxes are approximately an additional 10%.
The taxes when selling a primary residence have stipulations that will allow individuals to avoid paying the Capital Gains. If the home sold was the primary residence for at least two years out of the past five, as a single income taxpayer the gain is not more than $250,000 and for married couples no more $500,000.
What are the Taxes on investment properties as a US resident?
There are significant advantages for when purchasing real estate for investment purposes. The interest paid on mortgages is fully deductible. However, the downside for the investors is the points that may have spent to lower the interest loan rate, and the loan origination fees are not deductible.
For loans used to buy, construct, or make renovations on the property, the interest is fully deductible up to 1 million dollars for married couples and $500,000 for individual taxpayers. The interest on your home equity loans is deductible up to $100,000 for married couples and $50,000 for single taxpayers.
What are the Taxes due on sale for a Non-US Resident?
30% of the sales price is paid in taxes to the Federal and State Governments Taxes on the proceeds of sale for non-residents equal to 30% for foreigners on properties held longer than one year. The United States created the Foreign Investment in Real Property Tax Act in 1980 that withholds the taxes directly from the proceeds of the sale to guarantee payment of taxes from non-residents. The Internal Revenue Service withholds 10% of the sales price, and New York State withholds an additional 6.85% in taxes.
Either the seller or the buyer upon the sale of real estate must file the IRS form called Statement of Withholding on Disposition by Foreign Persons of United States Real Property Interests. Other states have specific state forms they require for the same reason. To avoid taxes placed upon the sale of real estate, foreign investors can use the protection of a Limited Liability Company (LLC) to buy and sell New York City real estate.
Do properties purchased under an LLC corporation avoid taxes?
“LLC’s can have multiple partners and provide additional protection and benefits to all the partners. One advantage of partnership within an LLC is when selling the real estate, there is the option to transfer the title of the property to the LLC to avoid the taxes upon the sale of the property. After buying a new property, the partners will transfer title to the partner of the LLC, so ownership is in the partner’s name.
Exemption options include a tax break if the property is used as a primary residence for two years but then you are forced to sell the home due to relocation for a different job, health reasons and other unavoidable circumstances.
Health issues include those that require a person to sell the home to raise money for medical expenses. The individual is not required to file a physician’s letter with the IRS, but it is advisable to keep such a letter with all personal information for future references in case you are audited.
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.” Unforeseen circumstances causing the sale of the home can include but are not limited to natural disasters, acts of war, acts of terrorism, death, divorce, separation, multiple births from the same pregnancy and change of employment status, which leaves the homeowner unable to provide the necessary level of living and paying for living expenses. Further information is available in the IRS Publication 523, which includes detailed descriptions of unforeseen circumstances.
Individuals enlisted in the armed services have a special provision in regards to the Capital Gain of the sale of their home. A law as of 2003 makes military personnel exempt from the two-year use of the home and has changed the requirement to be extended up to 10 years. The purpose of this law allows the military personnel the ability to fulfill the obligations of serving their country.
Before filing for any exemptions, we advise that you consult an accountant regarding the tax law exemptions for Capital Gains.
What are the tax advantages of having a mortgage?
Yes, there are significant advantages to financing your real estate property. The interest paid on the mortgage is tax deductible and reduces the income amount taxed. There are limits to the amount of interest claimed on taxes, so it is advisable to contact a professional tax consultant.
Capital Gains Schedule D for tax filing?
When filing personal income taxes with the IRS, the Schedule D is used to report Capital Gains. If the individual owned the residence for one year or less, the Capital Gain is included on the Schedule D as a short-term Capital Gain. If the home was owned longer than a year, it is indicated on the Schedule D as a long-term Capital Gain. The time of ownership is crucial to the period for reinvesting the Capital Gain in the future. If an individual can delay selling the residential home until they have lived in the house for over two years, they will have longer to reinvest any Capital Gain from the sale of the home.
What is a 1031 Tax Exchange a.k.a. Like-Kind Exemption?
One of the ways to avoid the Capital Gains tax is to purchase a “like-kind” property to replace the property sold. This means the newly acquired home will be of equal value or higher than the property sold. There are forms to file with the IRS at tax time to notify them of the purchase of a new residence and avoiding the Capital Gains tax. There is a time limit to acquiring a new property; the time limit is usually 180 days to take possession or to sign the closing paperwork on the new home. Only property within the continental United States qualifies for the like-kind exchange law.
- 1 NYC Real Estate Tax Guide
- 2 Property Tax Classes and Caps
- 3 Tax Assessments
- 4 Assessment Ratio Caps
- 5 What Does It All Mean?
- 6 What is the Capital Gains Tax on the Sale of a Primary Residence?
- 7 What are the Taxes on investment properties as a US resident?
- 8 What are the Taxes due on sale for a Non-US Resident?
- 9 Do properties purchased under an LLC corporation avoid taxes?
- 10 Tax Exemptions?
- 11 What are the tax advantages of having a mortgage?
- 12 Capital Gains Schedule D for tax filing?
- 13 What is a 1031 Tax Exchange a.k.a. Like-Kind Exemption?