Property Taxes in New York City Explained

New York City’s real estate taxes are some of the highest in the country. NYC also makes it complicated to understand. We discuss real estate taxes in-depth to help you understand when buying, owning, or selling in the city.

NYC’s real estate taxes are based on a property assessment plus an applicable tax rate. Categorized into a class, properties, and then taxed based on the appropriate rate and assessment ratio. The complicated government property tax system favors certain groups. The complexity has created much criticism of the system.

Overview

If the New York City real estate tax system seems difficult to understand, you’re certainly not alone. The system’s complexities are one big complaint, but it’s not the only one. Critics believe the way properties are taxed led to higher-income families paying lower percentages than those with lower income.

The tax system was also set up to subsidize residential housing by taxing commercial properties at a higher rate. This complicated system favors higher-income families with fewer property taxes than businesses or middle-class families.

NYC Property Tax Classes and Caps

The property’s taxable assessment calculates real estate taxes. That number is equal to the property assessment minus any possible exemptions. The payable assessment is then multiplied by the tax rate of the property.

• Class One
  Properties categorized as Class One include most residential properties with three units or fewer. This class also includes vacant land for residential use and small co-op and condo buildings. Condos in Class One must be three stories or less. These properties are charged 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 rentals, co-ops, and condos with a tax rate of 13.053% and an assessment ratio of 45%.
• Class Three
  Properties registered as Class Three include utility properties taxed at 12.577%, with an assessment ratio of 45%.
• Class Four
  Real estate in Class Four includes commercial and manufacturing properties in New York City. Including offices and factories. It is taxed at 10.612%, with an assessment ratio of 45%.

How is the NYC Property Tax Assessed?

New York City property is valued at 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 home’s market value. The formula includes external characteristics, square footage, number of rooms, the location, and how other similar homes have sold in the area. Although based on quantifiable data, assessments are still virtual estimates and can be appealed. If a person files a grievance, the Small Claims Assessment Review goes on the claim.

It might be a little consolation that the city’s property taxes are generally lower than the surrounding suburbs, which primarily fund education. However, at least we can illuminate the process.

Assessments

The city’s Department of Finance values or assesses your property annually. Each January, the department mails a Notice of Property Value outlining the property’s market and estimated value. The property tax rate is applied to your assessed value in calculating the year’s real estate taxes. If you disagree with your assessed value, you can challenge it by appealing to the NYC Tax Commission.

Assessment Ratio Caps

Class One property value increases are capped at 6% per year and 20% over five years. For Class Two properties, there is an 8% cap. These caps and other provisions have provided a much-criticized gap in property taxes in New York City.

Residential Classes

There are two classes of residential property for property tax purposes. Class 1; covers one and three-family homes, while Class 2 is for co-ops, condos, and rental units with more than four units.

The property taxes for a Class 1 property is comprised of four steps. The city will determine the market value by comparing the prices of similar properties sold in your neighborhood over the past three years. The assessed value is determined by taking the market value and multiplying it by the level of assessment (currently 6%).

Exemptions, or reductions, are subtracted to figure the taxable amount from this figure—some exemptions include those based on income, age, and disability. Your property tax bill is the taxable value times the tax rate (currently 19.554%), minus any abatements.

Class 2 property

For a Class 2 property, it is a bit more complicated, with five steps. The first one is to determine the market value, generally based on income earnings potential—next, the assessed value is obtained by multiplying the market value by 45.63%. Step three applies only to properties with 11 units or more; the next step is for exemptions, which are reductions in the assessed value. This taxable value is multiplied by the tax rate, 12.883%), subtracting any abatements or reductions to the tax to determine your property tax.

Property taxes have been rising annually due to higher assessments. Generally, the rate of increase has been in the mid-to-high single-digit range.

Payment process

There are two ways to pay your property tax bill. If you have a mortgage, you can pay your taxes with your monthly payment and the principal and interest on your loan. The other way is to pay the amount due on your own. If your property’s assessed value is less than $250,000, bills are mailed quarterly and due on January 1^st, April 1^st, July 1^st, and October 1^st, while semi-annually if the amount is more significant than $250,000.

In Sum

The news about property taxes is not all glum. Payments are deducted from your federal income taxes if your itemized deductions are high enough to offset the standard deduction. Lowers the amount you pay, with the benefit generally increasing for those in higher tax brackets.

What is the Capital Gains Tax on the Sale of a Primary Residence?

You taxed the difference between the purchase and selling price when selling your property, which equates to the profit realized upon sale. The gain is called capital gains. Depending on the home state, the amount of Capital Gains Tax varies. The taxes also vary between residents and non-residents. Other charges are considered when calculating the Capital Gains from the sale of a home.

The closing costs are 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 10%. When selling a primary residence, the taxes have stipulations that allow individuals to avoid paying them.

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 than $500,000.

Real Estate Capital Gains Schedule D for tax filing?

When filing personal income taxes with the IRS, Schedule D is used to report capital gains. Schedule D indicates a long-term capital gain if a home is owned longer than a year. If you owned the property for one year or less, the capital gain is included on Schedule D as a short-term gain.

The time of ownership is crucial to reinvesting the Capital Gain in the future. If an individual can delay selling the home until they have lived there for over two years, they will have longer to reinvest any Capital Gain from the home’s sale.

What are the Taxes on Investment Properties as a US resident?

There are significant advantages when purchasing real estate for investment purposes. The interest paid on mortgages is fully deductible. For loans used to buy, construct, or renovate 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 for up to $100,000 for married couples and $50,000 for single taxpayers. However, the downside for the investors is the points that may have been spent to lower the interest loan rate, and the loan origination fees are not deductible.

What are the Taxes Due on Sale for a Non-US Resident?

The United States created the Foreign Investment in Real Property Tax Act in 1980, which withholds the taxes directly from the sale proceeds to guarantee payment of taxes from non-residents. The Federal and State Governments tax non-US residents at 30% of the sales price. Taxes on the proceeds of sale for non-residents equal 30% for foreigners held longer than one year.

The Internal Revenue Service withholds 10% of the sales price, and New York State withholds an additional 6.85% in taxes. Upon the sale of real estate, either the seller or the buyer must file the IRS form. The form is called Statement of Withholding on Disposition by Foreign Persons of United States Real Property Interests.

Other states

Other states have specific state forms they require for the same reason. To avoid taxes placed upon the sale of real estate, International investors can use the protection of a Limited Liability Company (LLC) to buy and sell New York City real estate.

Do LLC Corporations Avoid Taxes?

“LLCs can have multiple partners and provide additional protection and benefits to all the partners. Partnership advantages within an LLC are when selling real estate; there is the option to transfer the property’s title to the LLC to avoid the taxes upon selling the property. After buying a new property, the partners will transfer the title to the partner of the LLC, so ownership is in the partner’s name.

Property Tax Exemptions

The exemption includes a tax break if the property is used as a primary residence for two years but then forced to sell due to relocation for a different job, health reasons, and other unavoidable circumstances. Health issues 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. However, keeping such a letter with all personal information for future references if you audited is advisable.

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.

IRS Publication 523

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 regarding the Capital Gain of selling their home.

A 2003 law exempts military personnel from the two-year use of the home and has changed the requirement to be extended up to 10 years. This law aims to allow military personnel 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.

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 to be claimed on taxes. It is advisable to contact an accountant to understand your particular situation fully,

What is a 1031 Real Estate Tax Exchange, a.k.a? Like-Kind Exemption?

To defer the real estate capital gains tax, purchase a “like-kind” property to replace the property sold. The newly acquired home will be of equal value or higher than the property sold. There are forms to file with the IRS to notify them of the new purchase and avoid tax.

There is a time limit to acquiring a new property; the time limit is usually 180 days to take possession or sign the closing paperwork on the new home. Only property within the continental United States qualifies for the like-kind exchange law.