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Selling New York City real estate can be a very complicated process—just as compli
cted as purchasing New York City real estate—particularly from the perspective of
taxes and exemptions. The following is a list of various potential tax obligatio
ns and exemptions that sellers should be aware of, in case any one of these vari
ous 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 lowe
r 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 deduct
ed up to $50,000.00 for individuals and $100,000.00 for married couples.
Capital Gains
Capital Gains are the profits that occur as a result of the difference between s
elling 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 pro
perty. 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 interes
t rate for the mortgage.
Generally, however, the taxes are 15% for residents of the United States who liv
e in New York State. In addition, approximately 10% is added for city taxes. Som
e individuals will be able to qualify for not having to pay Capital Gains. If th
e house was the seller’s primary residence for 2 (at least) of the last 5 years, t
he 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 be
en owned for 1 year or less than 1 year, the owner reports it as a short-term Ca
pital 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 residen
ce 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 owne
d for over a year, he or she must pay 30% of the price of the sale in Federal an
d State taxes. In 1980, the US government instated the Foreign Investment in Rea
l 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% fo
r 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 Withholdin
g on Disposition by Foreign Persons of United States Real Property Interests for
m 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 orde
r to accomplish a specific project, or a few specific projects, without necessar
ily wanting to tie themselves to one another permanently or more lastingly. Purc
hasing a property is a perfect example of a situation where multiple partners ma
y want to join together for one specific purpose. LLCs provide their partners wi
th added protections and benefits, which makes it even more enticing to many peo
ple. 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 transf
er 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 d
eductible and, further, reduces the amount of income that is taxed. One is advis
ed to consult with an accountant or professional tax consultant, however, becaus
e there are limits on how much interest one is allowed to claim on taxes.
Tax Exemptions
There are a number of situations in which tax exemptions are possible. If someon
e owns a home as his or her primary residence for at least two years but then ha
s to sell due to an unavoidable circumstance that makes relocation necessary, su
ch 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 possi
ble. In the case of health reasons, it’s advisable but not necessary for someone t
o 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 defin
es “unforeseen circumstances” as “the occurrence of an event that you could not reason
ably have anticipated before buying and occupying your main home.” Some examples i
nclude the ones listed above, as well as war, terrorism, natural disasters, sepa
ration 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 expe
nses. IRS Publication 523 describes “unforeseen circumstances” in great detail.
As far as Capital Gain goes, as of 2003, there is a special provision provided t
o 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. Additiona
lly, 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 1
80 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 loca
ted within the continental US.
Consulting an accountant on which, if any, of these exemptions you might apply f
or, is key.