Buyers and sellers of New York City real estate should consider taxes at three stages: when purchasing, while owning the property and when eventually selling it. The applicable rules depend on the purchase price, property type, financing, use of the property, tax residency and ownership structure.
Some charges are transaction taxes collected at closing, while others are recurring property taxes, income-tax liabilities or withholding requirements. Out-of-state and international purchasers may face additional nonresident or cross-border tax considerations. Because the treatment depends on the parties’ individual circumstances, tax advice should be obtained before the contract identifies the buyer and again before a sale.
Taxes and Charges When Purchasing
A purchaser of New York City residential real estate—including a condominium, cooperative apartment or townhouse—may pay New York State’s additional transfer tax, commonly called the mansion tax, when the purchase price is $1 million or more. The rate begins at 1% and increases for higher-priced residential properties in New York City.
If a condominium or townhouse purchase is financed, mortgage-recording tax may apply to the amount of the recorded mortgage. Financing secured by the shares and proprietary lease of an individual cooperative apartment is not subject to mortgage-recording tax.
In a new development or other sponsor sale, the contract may require the purchaser to pay New York State and New York City transfer taxes that are ordinarily paid by the seller in a resale transaction. These amounts should be included when comparing the complete cost of competing properties.
Taxes During Ownership
Condominium owners pay New York City real-property taxes, generally through quarterly or semiannual bills. The amount depends on the apartment’s assessed value, applicable tax rate and any exemptions or abatements. Common charges are separate from property taxes and are paid to the condominium.
If the apartment is rented, the rental income may be subject to federal, New York State and possibly New York City tax rules, depending on the owner’s tax status and ownership structure. Certain operating expenses, property taxes, interest and depreciation may be deductible, but foreign owners should obtain tax advice concerning reporting, withholding and any applicable treaty provisions before renting the property.
Taxes When Selling
An owner who sells New York City real estate may owe federal and New York State income tax on the taxable gain. New York City residents may also face City income tax, while out-of-state and international sellers may be subject to special nonresident filing or withholding requirements. The gain is generally determined from the sale price after permitted selling expenses, less the owner’s adjusted tax basis, which may reflect the original purchase price, qualifying acquisition costs, capital improvements and depreciation.
A seller whose property was a principal residence may qualify to exclude up to $250,000 of gain from federal taxable income, or up to $500,000 for certain married couples filing jointly. Generally, the seller must have owned and used the property as a principal residence for at least two of the five years preceding the sale and must not have claimed the exclusion on another sale during the preceding two years. This is not a lifetime exemption. Rental use, depreciation and periods of nonqualified use may affect the available exclusion.
The seller will also generally be responsible for New York State and New York City transfer taxes. The amount of tax ultimately owed is separate from any amount withheld or paid at closing, and the owner may need to file federal, state and, where applicable, City tax returns to report the sale and reconcile prior payments or withholding.
FIRPTA Withholding for Foreign Sellers
The Foreign Investment in Real Property Tax Act, commonly known as FIRPTA, generally requires a purchaser to withhold 15% of the amount realized when acquiring U.S. real property from a foreign person. The amount realized generally includes the purchase price and certain liabilities assumed by the purchaser. This is withholding against the foreign seller’s potential federal tax liability—not necessarily the amount of tax ultimately owed and not simply 15% of the seller’s gain.
An exception or reduced rate may apply in limited circumstances. A seller may also apply to the Internal Revenue Service for a withholding certificate when the required withholding would exceed the anticipated tax liability. Because the application and closing procedures require advance coordination, FIRPTA should be addressed with the seller’s tax adviser and closing attorney well before closing.
New York Estimated Tax at Closing
A seller who is not a New York State resident generally must calculate and pay estimated New York income tax on the gain at closing. For a condominium, this is ordinarily reported using Form IT-2663. The required payment is based on the estimated taxable gain rather than the entire sale price.
This New York requirement is separate from FIRPTA withholding. Both may therefore apply to the same transaction, although exemptions or special procedures may be available. The seller’s tax adviser should calculate the anticipated gain and prepare the required filings before closing.
Estate Planning and Ownership Structure
How a buyer holds title can affect taxes, financing and what happens to the property at death. Many buyers purchase in their own names; others consider joint ownership, a trust or an entity. The appropriate choice depends on the buyer’s circumstances and intended use of the property.
International buyers may face additional U.S. estate-tax and cross-border issues. Discuss the proposed ownership with your attorney and tax adviser before signing the purchase contract, particularly if you plan to use a trust or entity.
Plan Before Signing the Contract
Tax planning is most effective before the purchaser signs a contract and identifies the person or entity that will acquire the property. The buyer’s New York attorney, tax adviser, lender and real-estate representative should coordinate the ownership structure, financing and anticipated use of the property.
A prospective seller should also seek advice before signing a contract, particularly if the property has been rented, is owned through an entity, or the seller is not a New York or U.S. resident. Advance planning can help identify the adjusted tax basis, any principal-residence exclusion, transfer taxes, estimated-tax requirements and withholding that may apply at closing. For related guidance, see How Buyers Should Structure Ownership of New York City Real Estate and Closing Costs for Buyers of New York City Real Estate