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Taxes on Selling a House in New York: Everything You Need to Know

When it comes to selling a house in New York, many people focus on the sale price and real estate agent commissions without considering the taxes involved in the transaction. Understanding the tax implications is...

When it comes to selling a house in New York, many people focus on the sale price and real estate agent commissions without considering the taxes involved in the transaction. Understanding the tax implications is crucial as they can significantly impact your bottom line. In this article, we'll delve into the taxes associated with selling a house in New York and provide you with valuable insights to help you navigate this process.

What are the Taxes on Selling a House?

Property Taxes On Selling A House Image Source: sanaulac.vn

One of the most important tax considerations when buying or selling a home in New York is capital gains tax. Capital gains tax refers to the profits you make from a real estate or property purchase, calculated as the difference between the selling price and the purchase price.

The amount of capital gains tax you'll owe depends on various factors, such as the property's condition and the buyer's legal residency status. Different adjustments are made based on these factors. Additionally, there are deductions available, including fees for loan application origination, closing costs, and points paid to lower the mortgage rate.

In general, capital gains taxes for U.S. residents in the State of New York are around 15%. If the property is located in New York City, you need to account for an additional 10% in NYC taxes. However, you may qualify for an exemption.

If the house was your primary residence for at least two years within the last five years, you qualify for a capital gains exclusion of $250,000 for individuals and $500,000 for married couples. Reporting capital gains taxes can be done on Schedule D of your IRS form. It's important to note that if you owned the property for one year or less, it's considered a short-term capital gain, while ownership beyond one year qualifies as a long-term capital gain.

Living in the residence for at least two years before selling the house is beneficial, as it allows you more time to reinvest the capital gain from the sale.

Property Tax Rates in New York

Property tax rates in New York are used to calculate the value of your house. Your property tax bill will reflect rates for your school district, city, special districts, and county. Some places may have additional charges to support specific projects or services, like parks and libraries.

Property tax rates in New York are expressed in mills or millage rates, where one mill represents one dollar of tax for every $1,000 of property value. Effective tax rates, which indicate actual tax payments relative to the home's value, can be more informative.

Tax rates vary based on your tax class, which is determined by the type of property you own. There are four tax classes in New York: Class 1 (One-Three Family Homes), Class 2 (Condominiums, Cooperatives, and Rental Building Apartments), Class 3 (Special Franchise Properties and Utilities), and Class 4 (Commercial Properties).

New York City has finalized the real estate tax rates for the fiscal year 2021/22. Rates for Class 2 residential properties are decreasing, while rates for Class 4 nonresidential buildings (commercial) are increasing.

Comparison of Annualized Tax Rates Image Source: jdsupra

It's worth noting that the new tax rates were not in effect when the tax reform was passed on July 1, 2021. Subsequent tax bills will be modified to reflect these changes.

Tax Rate by County (New York)

The State of New York has a 4% state sales tax and allows local authorities to impose a 4.875% local choice sales tax. With 640 local tax authorities, the median local tax rate in the state is 4.254%.

The highest sales tax rate in New York is 8.875% when combined with the state sales tax in certain cities like Brooklyn, New York, Bronx, Staten Island, and Flushing (along with 54 other cities). The following table shows the median effective tax rates in New York State for each county.

Tax Rate By County (New York) Image Source: smartasset

While other taxes in New York City may be relatively high, such as sales and income taxes, the property tax rates are quite modest. The City Council has established various property tax exemptions to help alleviate the tax burden for many New Yorkers. Eligible exemptions include the Disabled Homeowners Exemption, Veterans Exemption, Senior Citizens Homeowners Exemption, and School Tax Relief (STAR) Exemption.

Non-U.S. Resident Tax Concerns in New York

It's important to note that taxes work differently when a non-U.S. resident is involved in selling a New York house. If a non-resident owns the property for over a year, they must pay 30% of the sale price in federal and state taxes. This is due to the Foreign Investment in Real Property Tax Act, which withholds these taxes from the sale's proceeds to ensure that non-residents pay taxes on real estate transactions. New York State withholds 6.85%, while the IRS withholds 10%. Buyers or sellers must file a "Statement of Withholding on Disposition by Foreign Persons of United States Real Property Interests" form with the IRS when selling real estate.

One way to avoid these taxes is by creating a Limited Liability Company (LLC), which transforms the entity buying or selling real estate in New York into a separate legal entity rather than an individual.

Know Tax Exemptions for New York Home Buyers & Sellers

It's essential to be aware of the many tax exemptions available to home buyers and sellers in New York. If you own a house as your primary residence for at least two years and have to sell it due to unavoidable circumstances like relocation for a promotion or health problems, you can receive a tax exemption. For health-related reasons, having a detailed letter from a physician is recommended in case of an audit.

You can also qualify for a real estate tax exemption based on "unforeseen circumstances." The IRS defines this as an event that couldn't have been reasonably anticipated before buying and occupying your main home. Examples include natural disasters, divorce, death, multiple births from one pregnancy, terrorism, or a change in employment status. Consult IRS Publication 523 for a clearer understanding of what qualifies as "unforeseen circumstances."

In terms of capital gains, members of the Army, Navy, or National Guard don't need to have lived in the house for at least two years to qualify for the exemption. Instead, they need to have used the property as a primary residence within the last ten years, considering that military members may be away on active duty.

Another way to qualify for a capital gains exemption is to purchase a "like-kind" house or property, which means buying a property of equal or greater value than the one you sold. Certain restrictions apply, such as purchasing the new home within 180 days of selling the previous one. If you pursue this exemption, you must file the necessary forms with the IRS to inform them of the new purchase. Additionally, the new property must be within the continental United States.

Mortgage Tax Advantages

There are tax advantages to having a mortgage on your New York house. The interest you pay on your mortgage is tax-deductible, reducing the amount of taxable income. It's advisable to consult an accounting or tax professional because there are limits and regulations regarding what you can claim related to real estate taxes. Ensuring compliance with the New York State and IRS guidelines is crucial.

Have You Decided Selling Is Your Best Option?

Now that you are aware of the taxes involved in selling your house in New York, it may seem like a lot of information to process. However, if you have made the decision to sell, you can sell your house as-is directly to a cash buyer like Leave the Key Homebuyers.

Leave the Key Homebuyers purchases houses in any condition and situation. They will promptly review your property's details and arrange a meeting at the property. They handle all repairs, allowing you to avoid any worries. Once they assess the house's value, they will make a fair cash offer. If you accept, you can set the closing date, and all that's left to do is sign the contract and receive your cash.

Selling a house involves considering various taxes, exemptions, and legal requirements. By understanding the intricacies, you can make informed decisions and maximize your returns while minimizing any potential liabilities.