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 20% 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.
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.
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.
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.
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 a Corporation or a Limited Liability Company (LLC) to buy and sell New York City real estate.
Corporations and LLC’s can have multiple partners/shareholders and provide additional protection and benefits to all the owners. One advantage of partnership within an LLC or a corporation is when selling the real estate there is the option to transfer the title of the property to the LLC or corporation to defer the taxes upon the sale of the property.
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.
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.
The gradual increase in sales prices can be partially attributed to Manhattan's strict zoning laws, which greatly restrict the number of available residential properties in the borough. Other factors include New York City's growing population, currently at 8.24 million in NYC as a whole and 1.6 million in Manhattan alone according to the United States Census Bureau. The recent global financial crisis slowed down new constructions in the city, and as a result, New York's real estate supply is restrained. This has created a supply-demand issue and a potential opportunity for savvy investors.
There is also some inflation in wealthier communities, but analysts expect prices to continue to rise with many luxury homes and luxury rentals. According to the Wealth Report, a publication that provides a global perspective on prime properties, Manhattan ranks 17th among major cities for cost per square foot.
This shows the potential of property investments in the city, especially compared to cities like London, Hong Kong, Paris and Moscow, all of which have more expensive real estate per square foot in prime housing locations. Given this analysis, property costs in Manhattan are remarkably low relative to their value.
Unlike many of these major cities, New York real estate is easily available for foreign nationals. The United States' friendly real estate purchasing regulations allow Manhattan to draw in a global market of buyers. As a direct result, sellers in the city have a larger pool of potential buyers and can make relatively safe real estate investments.
