There are various taxes and exemptions associated with owning New York City real estate.

 

Taxes Associated with Investments in Real Estate by U.S. Residents

Note: The information contained herein does not represent an official view of Etage Real Estate, LLC or its employees and is not intended or written to be used, and cannot be used for purposes of avoiding taxes. Etage Real Estate, LLC does not represent or warrant that the information below is correct and is subject to change, errors and omissions. The statements below do not constitute, and are not a substitute for, professional tax advice and are offered for general information purposes only. Anyone planning to invest in U.S. real estate should seek competent U.S. tax advice as it pertains to his or her particular situation.
 

1. Property Taxes/Real Estate Taxes

New York City, like most local governments in the United States imposes a property tax as a principal source of revenue. The tax is computed based on a fair market value of the property times an assessment ratio times a tax rate. Values are determined by local bureaucrats, and are often disputed by property owners. For more information please see the NYC Department of Finance Website.
 

2. Income Tax

Income taxes are imposed by the Federal government, most states and certain local governments. For federal income tax purposes, U.S. residents and citizens are taxed on their worldwide income, but the tax authorities allow taxable income to be reduced by taking certain deductions (e.g. business expenses, home mortgage interest, state taxes, charitable contributions etc.). Many deductions are subject to limits.

U.S. residents should be aware that in most cases, interest on a mortgage on a primary residence is deductible from their taxable income, which is a major incentive offered to stimulate homeownership. For loans used to buy, construct, or make improvements on property, the interest is fully deductible up to $1 million for married couples and $500,000 for individual filers. Moreover, the interest from home equity loans is deductible up to $100,000 for married couples and - $50,000 for individual filers.

Click here to learn more about whether interest on your property is deductible.
 

3. Capital Gains Tax

Individuals and corporations pay tax on their net capital gains upon exiting an investment. Short-term capital gains are taxed at the ordinary income tax rate, which is higher than the tax rate for "long-term capital gains", which are gains on capital assets that have been held for over one year.

U.S. residents should be aware of a major tax incentive the Federal government gives to encourage home ownership: namely, if a property is a principle residence for at least two years (out of the past five), an individual is given $250,000 capital gains tax exclusion and this number is increased to $500,000 for married couples (with some exceptions).

To read more about capital gains taxes and exemptions for principle residences, click here. 

If the property under consideration is for investment purposes then it may be possible for individuals to defer capital gains taxes completely with tax planning strategies such as the 1031 like-kind property exchanges.

For other information on capital gains taxes, see Internal Revenue ServiceNY State Department of Taxation, and the NYC Department of Finance.
 

4. Estate Tax

As described by the IRS, the Estate Tax is “a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death... The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "Gross Estate." Although the Estate Tax is federal tax many states also impose a similar tax, with the state versions called either an estate tax or an inheritance tax.

As with other assets, United States domiciliary is a subject to estate tax on the value of its real estate.  If you plan to be a long-term owner of real estate in the United States and foresee this property will become a part of your estate, then it is very important that you seek out the help of a tax lawyer or certified public accountant who can find the optimal legal structure.

Click on these links to get more information on federal estate tax and NY State estate tax.
 

5. Gift Tax

As described by the IRS, the gift tax is a “tax on the transfer of property by one individual to another while receiving nothing, or less than full value in return.” It is different than the estate tax in that it deals with the transfers of property while an individual is still alive.

Whether a gift of property is subject to gift tax depends on the amount of the gift and its nature. As with the estate tax, if there is a possibility that the property may eventually be gifted to a third party, then it is imperative to take this into consideration when choosing the optimal holding structure.

For more information, please see the gift tax section of the IRS website.
 

6. Mansion Tax

According to New York State, if the purchase price of a home is $1 million or more, you are buying a mansion, which qualifies most home purchases in New York City for the Mansion tax, be it an actual mansion or a 500 square foot studio apartment. The Mansion Tax is calculated as 1% of the entire purchase price and is paid by the buyer.

Note: the mansion tax is not deductible from taxable income, but it does increase the property’s tax basis so it will ultimately reduce the capital gains taxes paid on a sale of the property.

Note: The information contained herein does not represent an official view of Etage Real Estate, LLC or its employees and is not intended or written to be used, and cannot be used for purposes of avoiding taxes. Etage Real Estate, LLC does not represent or warrant that the information below is correct and is subject to change, errors and omissions. The statements below do not constitute, and are not a substitute for, professional tax advice and are offered for general information purposes only. Anyone planning to invest in U.S. real estate should seek competent U.S. tax advice as it pertains to his or her particular situation.


Click Here to read about Taxes Associated with Investments in Real Estate by Non-resident Aliens