New York Property Capital Gains Tax (and other taxes)
Posted by Wei Min Tan on March 16, 2020
Summary of the major tax categories when buying property in Manhattan, New York. Besides capital gains, there is also monthly property tax, income tax and estate (inheritance) tax.
Property tax is provided as a monthly amount with each property but paid quarterly. A rough guide is $1.50 per square foot per month but it varies with the apartment and building. For example, a 1000 sqft apartment may have monthly property tax of $1,500. This is the second largest carrying cost after common charges each month (excluding mortgage).
Back in the 2006-2008 new development era, buildings came with 421A tax abatements that usually lasted 10 years. Those have since expired. Current new launch properties rarely have tax abatements. However, there is a Condo and Coop Abatement where primary residence owners can save up to 17.5 percent on property taxes.
This depends on the owner’s income level but assuming the owner only has income from one property in the U.S., it should be around 20 percent of taxable income. It’s important to note that the U.S. allows annual depreciation of investment property. This depreciation is a phantom expense which should wipe out taxable income especially in the early years of ownership.
Estate (Inheritance) Tax
While U.S. residents have estate tax exemptions, the exemption for foreign property owners is minimal. Hence inheritance tax is the biggest exposure for foreign buyers because it can be up to 50 percent of property value.
It is extremely important to get sound advice from a foreign buyer expert when structuring the purchase. There are simple ways or more complex ways, both of which would protect the owner’s estate from estate/inheritance taxes.
Deal example (below): 959 First Avenue: Toll Brothers’ development which required only 10 percent reservation deposit. Buyer clients reserved units at pre-construction stage. Roughly $2 million for one bedrooms. The buy decision based on quality finishings, classic style windows and excellent location close to United Nations and Fortune 500 headquarters.
Weimin’s article, How to buy new launch property in Manhattan
Capital Gains Tax
Capital gains tax is the taxes levied on the profit arising from sale of the property. Assuming the owner has owned the property for more than 1 year, capital gains tax ranges from 22 percent (if property is held individually) to 30 percent (if property is held through an entity or company). The latter was decreased from a previously higher rate as a result of Trump’s tax reduction initiative. Another area to get advice from an experienced tax attorney.
For primary residence owners, there is a capital gains tax exemption of $250,000 for individuals and $500,000 for married couples. To qualify, the owner must have lived in the property for at least 2 out of the previous 5 years.
Deal example: 200 Chambers Street, Tribeca. Luxury building in Tribeca commanding premium price and premium rents. This unit on the 7th floor has gorgeous view of the Hudson River to the west. Purchased at around $1.4 million, rented out immediately after closing of the sale.
Most Buyers Don’t Plan Properly
For tax matters above, we will refer clients to an experienced tax attorney who can provide specific advice as individual situations differ. This includes how best to hold the property for legal and tax benefits.
We are quite surprised to find that most buyers of Manhattan property do not plan properly from the beginning and are very unaware of tax consequences. This is because they lack an experienced team. Of course, this would not apply to you as you’re doing research (or you wouldn’t be Googling and finding this article).
Many investor buyers get into Manhattan property based on recommendation from a friend. Brokers they deal with defer any questions to the lawyer, the majority of whom wouldn’t be able to talk about tax and accounting because they are not qualified as accountants. This hence requires another conversation with an accountant and most accountants do not deal with foreign buyers. Anyway, you get my point.
Read more, Buying property in Manhattan to rent out
Note: Please consult your attorney or CPA regarding legal and tax matters as individual situations differ. The above is not written by an attorney or CPA and is not legal or tax advice.
What We Do
We focus on global investors buying Manhattan condos for portfolio diversification and long term return-on-investment.
1) Identify the right buy based on objectives
2) Manage the buy process
3) Rent out the property
4) Manage tenants
5) Market the property at the eventual sale
Deal example: Parc Vendome, Midtown West. Value buy but required renovation. The buying decision based on south exposure with plenty of sunlight and proximity to Central Park. Totally renovated the apartment after the closing. Before/After photos below. Rented immediately after the renovation was completed.
Article updated on March 16, 2020
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