Taxes Foreign Buyers Should Consider When Buying and Selling a NYC Condo

Sep 26

Foreign buyers of New York City condominiums 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, financing, use of the apartment, tax residency and ownership structure.

Some charges are transaction taxes collected at closing, while others are income-tax liabilities or withholding requirements. Because tax treatment depends on the purchaser’s individual circumstances and may also involve the laws of the purchaser’s home country, tax advice should be obtained before the contract identifies the buyer.

Taxes and Charges When Purchasing

A purchaser of a New York City condominium 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 the purchase is financed, mortgage-recording tax may also apply to the amount of the recorded mortgage. In a new development, the sponsor 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

A foreign owner who sells a New York City condominium may owe federal and New York State income tax on the taxable gain. 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.

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 tax withheld at closing, and the owner may need to file federal and New York tax returns to report the sale and reconcile amounts previously paid or withheld.

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

For a purchaser who is neither a U.S. citizen nor domiciled in the United States, direct ownership of U.S. real estate can create U.S. estate-tax exposure. The rules, available exemptions and treaty benefits may differ substantially from those applicable to U.S. citizens and residents.

Ownership in an individual name, limited liability company, trust or other entity can produce different income-tax, estate-tax, financing, privacy and reporting consequences. The appropriate structure should be evaluated before signing the purchase contract, because changing ownership after closing may create additional taxes, costs and lender or condominium-approval issues.

Plan Before Signing the Contract

Tax planning is most effective before the purchaser signs a contract and identifies the person or entity that will take title. The buyer’s New York attorney, tax adviser, lender and real-estate representative should coordinate the ownership structure, financing and anticipated use of the apartment.

Foreign Buyer Taxes

ed Schor