There are various taxes and exemptions associated with selling New York City real estate. Below you will find questions we are often asked and the answers that should help you understand your tax obligations.
What are the Capital Gains on the Sale of a Primary Residence
Sellers are taxed on the difference between the purchase and selling price that equates to the profit realized upon sale. The profit 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, points 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 tax payer 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 paid to lower the interest loan rate and the loan origination fees are not deductible.
For loans used to buy, construct, or make improvements on property, the interest is fully deductible up to $1million dollars for married couples and $500,000 for individual tax payers. The interest from home equity loans is deductible up to $100,000 for married couples and $50,000 for individual tax payers.
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 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 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 personal 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.
Unforeseen circumstances are defined by the IRS 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 basic 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.
Prior to 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 of 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 reported on the Schedule D as a short-term Capital Gain. If the residence was owned longer than a year, it is reported 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 a individual can delay selling the residential home until they have lived in the home 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 new acquired home will be of equal value or greater 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 residence; the time limit is usually 180 days to take possession or to sign the closing paperwork on the new residence. Only property within the continental United States qualifies for the like-kind exchange law.