All About Real Estate Taxes
Since the US law is based on precedents rather than on a set of strict rules, inherited from the Roman law in continental Europe, there are often more than one possible view on the same issue. Several lawyers and accountants might have different, even conflicting opinions on the same subject. When choosing professional counsel, try to meet more than one lawyer or accountant/tax consultant. That way you'll be able to choose a professional, whose arguments make sense to you and whom you trust the most.
Below please find one of the opinions on the subject of tax implications of real estate ownership in New York:
What are the taxes on sale proceeds? Read
What are the taxes on sale proceeds for the investment property for US Tax residents? Read
What are the taxes on selling a home (primary residence) for US Tax residents? Read
What are the taxes on sale proceeds for a non-resident? Read
Does it make sense to buy a property in the name of a US domestic company? Read
Are there tax benefits to taking a mortgage? Read
What is Like-kind exchange? Read
What are the taxes on sale proceeds?
Sale proceeds from real estate property in New York are taxed differently depending upon whether you are selling your home (primary residence) or your investment property. They also vary for US tax residents and non-residents.
Generally, an increase in value of any real estate property, which was held one year or longer, is taxed as capital gains. Calculating the Gain/Loss is easy:
Gain/Loss = Amount Realized [Selling Price - Selling Expenses] - Adjusted Basis [Cost + Improvements].
Closing costs, points and loan origination fees are added to the cost basis of the property and deducted at the time of sale.
Those who used their real estate as their home have tax exemptions described below. Foreign investors are subject to additional withholding, also described below. The information below is an approximate assessment, please consult your accountant or tax adviser about your circumstances.
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What are the taxes on sale proceeds for the investment property for US Tax residents?
When selling an investment property, the tax is paid on capital gains. The Federal tax on capital gain for property held more then a year for US tax residents is currently 15%. New York State and City tax comprises approximately an additional 10%.
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What are the taxes on selling a home (primary residence) for US Tax residents?
If you are a US tax resident and own a property, which you used as a primary residence for at least 2 years out of the 5 past years, you don't have to pay tax on the gain as long as it doesn't exceed $250,000 if you are single, and $500,000 if you file taxes as Married Filing Joint Return. You don't need to report the income if all gain is excluded. Some time limitations apply to this exclusion though.
In certain circumstances, there can be a reduced exclusion when the ownership and use tests are not met, for instance, if you use your home as primary for slightly less than 2 years. Reasons for this would be a change in job location, health, or unforeseen circumstances. Please contact your tax professional for more information regarding these exceptions.
Unfortunately you cannot use loss from the sale of personal residence real estate to offset your other income.
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What are the taxes on sale proceeds for a non-resident?
There is a significant difference in tax liability for foreign and US tax residents. Federal tax on long term (property held more then a year) capital gain for US tax residents is 15%. Same tax for foreign residents is 30%.
Moreover, to insure payment of the U.S. tax, non-residents are subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) income tax withholding immediately upon sale of a property by a foreign resident. The Internal Revenue Service (IRS) withholds 10% of the gross sale price; New York State withholds an additional tax of approximately 6.85% of the Estimated Gain. An IRS form must be filed by the seller/buyer - Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. For New York State, an additional form must be filed - Nonresident Real Property Estimated Income Tax Payment Form (Complex form, please consult with a tax professional for completion).
To avoid this complexity, in some cases it makes sense for a foreign buyers to own real estate through a domestic Limited Liability Company or LLC.
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Does it make sense to buy a property in the name of a US domestic company?
For foreign investors in real estate in New York it often makes sense to own real estate through a through a domestic Limited Liability Company or LLC.
Such company needs to be formed in the same state, where real property is located. Forming LLC in New York is easy and will take only a couple of weeks. LLC must file business tax returns (Federal, State and Locality). It can have an unlimited number of members/owners (U.S. & Non-U.S residents). When the time comes to sell the property, owners can sell (transfer) the shares in the LLC to the buyer.
Keep in mind, that there are tax treaties between the US and your county to be considered which may offset the benefits of an LLC. Therefore, it is beneficial to discuss the best structure for your purchase with a tax adviser familiar with international tax laws. Evans will be happy to refer you to a tax professional who can advise you, which solution is right for your individual situation.
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Are there tax benefits to taking a mortgage?
Yes, mortgage interest is generally tax deductible. There might be, however, limitations on the exact amount of deductions for home owners. Please consult your accountant to figure deductions. Different rules apply to various types of mortgage loans.
If you are an investor, i.e. you rent your property out, your mortgage interest on the property is fully deductible without any caps on the amount borrowed. However, points and loan origination fees are not deductible. They are added to the cost basis of the property and deducted at the time of sale. Refinanced loans used for business purposes are deductible as mortgage interest expenses. Your tax professional will be able to consult you regarding each circumstance.
Home Purchase Loans are loans used to buy, construct, or make improvements to property. Interest on these loans is deductible for up to $1 million ($500,000 for married filing separately) in debt, i.e. if you borrow above that amount, the interest on the exceeding amount is not deductible.
Home Equity Loans are loans secured by real property but used for other purposes. Interest on these loans is deductible for up to $100,000 ($50,000 for married filing separately) in debt.
Points are additional fees paid to obtain a mortgage. For home owners these points are treated as interest and are deductible on the Schedule A.
Cooperative Housing Corporations (Co-Ops) vary from one to the other. In many cases mortgage interest and property taxes of co-ops are allocated to tenant-shareholders based on the number of shares and are included in monthly maintenance payment of a Co-op. The co-op usually issues a year-end statement with these amounts. They are generally deductible on your Schedule A; however, you should always consult a tax professional for advice.
Read FAQ about mortgages
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What is Like-kind exchange?
If you intend to sell one property and buy another, instead of paying tax on the gains of the property, you have an option of filing for a like-kind exchange. To do so, cash from the sale must be deposited in an escrow account and disbursed from that account for the new purchase. You don’t have too much time to shop around, since a new property must be identified within 45 days from the date in which the original property was sold. The purchase of new property must be completed within 180 days, so one has to go into the process being well prepared. Only properties within the U.S. qualify for the like-kind exchange.
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This tax guide was prepared by David Almog of United Revenue Service. Please contact David Almog with any questions regarding tax liability that arises from buying, owning and selling real estate in New York.
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