An overview of the NYC real estate taxes you’ll have to face when buying, selling or simply maintaining a property in New York City. Read this guide before buying, whether it’s your first or your tenth home purchase!
Updated for the Tax Cuts and Jobs Act slated to take effect on January 1, 2018!
Table of Contents:
Why Are NYC Real Estate Taxes so High?
The total tax burden for primary residence home owners in New York City can be excruciatingly high after you add in income taxes, sales taxes and other miscellaneous taxes unique to New York.
Property Taxes in NYC
However, property taxes by themselves in NYC are surprisingly lower than both the New York State average and the property tax rates of surrounding states like New Jersey. According to SmartAsset, New York County’s average property tax rate is only 0.72% vs 1.5% for New York State. That’s still high compared to Hawaii, which charges only 0.27% property tax on average according to a recent study by WalletHub.
The reason that New York can afford to charge less for traditional property taxes is because of the many other revenue sources available such as the high income taxes charged by both the city and state governments.
Because income taxes hit both renters and home owners alike, property owners in NYC take a smaller burden of the total taxes paid vs other counties and states. Furthermore, New York’s finances are helped by sales tax income from a booming tourist industry, taxes on various industries and higher taxes on other property types such as commercial buildings.
Moreover, NYC in unique in charging an income tax on pass through businesses such as LLCs and S-Corps called the Unincorporated Business Tax (UBT) which equates to a double taxation on the same income at the city level. Larger businesses structured as corporations can’t escape either, they face an even higher General Corporation Tax (GCT) by New York. These are just some of the things to consider before you buy an apartment in NYC.
One of the largest closing costs for home purchasers in NYC consists of the Mortgage Recording Tax. This tax only applies to purchasers of real property, which means co-op apartment buyers are luckily excluded. This tax is levied only on the mortgage loan amount, not the purchase price.
The NYC Mortgage Tax
Per Form MT-15, Mortgage Recording Tax Return on the NYC Department of Finance website:
– All mortgages securing less than $500,000: 2.05%
– Mortgages of one-, two-, or three-family houses and individual residential condominium units, securing $500,000 or more: 2.175%
– All other mortgages securing $500,000 or more: 2.80%
How can you avoid the Mortgage Recording Tax in NYC?
You can partially avoid the Mortgage Recording Tax through a Consolidation, Extension and Modification Agreement, otherwise known as a CEMA loan. In a CEMA loan for a purchase, the seller’s bank will assign the seller’s mortgage to the buyer’s bank. This means the buyer will only have to pay Mortgage Recording Tax on any fresh loan amount he or she borrows in excess of the seller’s remaining mortgage principal.
For example, say that the buyer wants to take out a $1 million mortgage for the purchase and the seller’s remaining mortgage balance is $800,000. In this case, the seller’s $800,000 mortgage is assigned to the buyer’s bank and consolidated with a new mortgage of $200,000. Because only the $200,000 is a new mortgage, the buyer will only have to pay mortgage recording tax on the new $200,000 loan.
While most banks will not have an issue with a CEMA loan for refinancing’s, especially if they are on both sides of the transaction, many banks will not be comfortable doing a CEMA loan for a purchase. Check with one of our seasoned real estate brokers for advice on which NYC mortgage lenders are best for executing a purchase CEMA.
Per New York State Tax Law, Section 1402-a, the Mansion Tax is a tax of “1% of consideration payable by the grantee on the transfer of a one, two or three family house, a condominium unit or a cooperative unit used in whole or in part as a personal residence when the total consideration is $1,000,000 or more.”
It’s very important to understand that the law specifies “consideration” versus price.
Consideration vs Price
The total consideration can be very different from the contract price. Total consideration takes into account any closing costs that the buyer paid on behalf of the seller. This is very commonplace in new development sales where the sponsor attempts to have the buyer pay for the sponsor’s transfer taxes and attorney fees. You need to be careful as these extra payments will add to your total consideration, and a deal that you thought was just under the Mansion Tax threshold might actually be over the threshold.
Furthermore, the cost of a live-in superintendent’s apartment in a new development is now commonly passed onto buyers whereas in the 1980’s and 1990’s sponsors used to give them to the superintendent for free. The three most common ways for this cost to be passed onto buyers is:
1. At closing every buyer contributes to purchase the extra apartment for the superintendent
2. The developer gives a loan to the building for the cost of the extra apartment
3. The sponsor owns the superintendent’s apartment and leases it to the building, typically for 5 years
Depending on how the transfer of the superintendent’s living quarters is structured, a buyer’s total consideration can go up by the amount they contributed for the extra apartment.
Make sure you talk to one of our veteran real estate brokers who can help guide you through the purchase process, especially if you are on the borderline of having to pay the Mansion Tax. There are too many novice real estate agents who will lead you to believe that you’ll always be able to avoid the Mansion Tax by having your contact price be even one dollar short of $1 million!
Sales Tax and Tax Escrows in NYC
Sales Tax – This is a minor, recent development. Sales tax is now being regularly applied on the cost of the title search.
Tax Escrows – An experienced real estate attorney will explain this to you in detail, and include all the money you’ll need to put in escrow for property taxes in a detailed closing costs statement for you before closing day. Don’t be shocked when you see the amount you’ll need to set aside in escrow for taxes as this amount can vary dramatically depending on your closing date.
Keep in mind that NYC’s fiscal year starts on July 1, so a seller will pay the remainder of quarter’s property taxes and you will owe a credit to the seller on the closing statement. Furthermore, your lender will typically require you to hold 3 to 4 months of property taxes in escrow, as well as home insurance.
NYC Real Estate Taxes When Selling a Home
NYC and NY State Transfer Taxes
One of the most onerous NYC real estate taxes you’ll have to pay as a seller are the dreaded NYC and NY State transfer taxes which we discuss in detail in a separate article.
In summary, the transfer taxes New Yorkers will have to face consist of the following.
For a 1-3 family home, condo or co-op:
$500k or less: 1%
Greater than $500k: 1.425%
Other property types (commercial and industrial):
$500k or less: 1.425%
Greater than $500k: 2.625%
The Co-op Flip Tax
One of the most hated NYC real estate taxes is the Flip Tax, which is most often imposed by co-op boards on sellers. This is a private tax that can vary, but is typically 1 to 3% of the sale price. The proceeds go into the building’s reserve fund. Some buildings do not care who actually pays the flip tax, in which case the flip tax can be a negotiating point and the seller may be able to coax the buyer into paying it instead.
Note: We are seeing more and more language in the offering plans of new construction condos that allow for the possibility of a flip tax to be imposed. This is alarming and new for condo buyers. Condos typically do not have this tax, and for an older condo building to impose a tax, typically a three quarters vote of the owners would need to be secured before it can be imposed.
Capital Gains Tax For New Yorkers
Federal and State – it’s important to note that NY State’s income tax covers capital gains. Please read our article on buying property as a foreigner in NYC to learn more about capital gains taxes that foreigners and American nationals have to face alike.
Long-term versus Short-term – No doubt you’ve heard from your stockbroker that long-term holdings are taxed at lower rates versus short-term holdings when you sell. The threshold is one year. Please read our article on buying property as a foreigner in NYC referenced above to learn more about capital gains taxes that foreigners and American nationals have to face alike.
FIRPTA is a mandatory tax withholding on sales of US property by foreign owners. The reason this tax exists is to prevent foreign sellers from taking the proceeds and running, and not worrying about paying their share of taxes come April 15th because they have no substantial remaining ties in the US.
As a result, buyers are required to enforce FIRPTA withholding, which amounted to 10% of the sale price before February 2016. Since then, FIRPTA withholding has been amended to 10% if the sale price is under $1 million, but 15% if the sale price is over $1 million.
Please read our article on buying property as a foreigner in NYC to learn more about FIRPTA tax withholding that foreigners have to face when selling property in the US.
Tax Exemptions for Selling Primary Residences
NYC real estate taxes are mitigated by the fact that primary residence sales are covered by IRC Section 121 with a $250,000 exemption for single filers, and a $500,000 exemption for married filers.
An important requirement you must fulfill to be eligible for this exemption is that this residence must have been your primary residence for at least 2 out of the last 5 years. The 2 years of primary residency does not need to be consecutive. Furthermore, there is no requirement for you to purchase a replacement property to take advantage of this exemption.
For example, say you moved to an apartment in NYC a year and a half ago from your Westchester mansion which you’ve lived your entire life. If you wish to sell your Westchester home and to take advantage of this exemption, you must sell within the next half year. Otherwise you will either have to change primary residences and move back to Westchester, or you will not be eligible for the exemption.
This tax exemption is the reason why so many co-op buildings have sublet policies that only allow shareholders to sublet their apartments a maximum of 3 out of 5 years. It’s to make sure that they can take advantage of this tax exemption!
Legislative Update: there are no changes to this much loved tax exemption as a result of the recently passed Tax Cuts and Jobs Act. Though Congress had debated limiting this principal residence capital gains tax exclusion (i.e. proposals such as changing the primary residency requirement to 5 out of the last 8 years), it was ultimately scrapped much to the relief of home owners nationwide.
Tax Benefits of an Investment Property
Before the wide sweeping tax reforms of 1986, real estate used to be the ultimate tax shelter for just about every high income individual. The tax laws before 1986 allowed accelerated depreciation via ACRS and an unlimited deduction of losses against other active income. As a result, dentists and lawyers were purchasing real estate and investing in real estate partnerships en masse to reduce their income tax liability.
The tax reform of 1986 changed all of that. Depreciation went from ACRS to straight line depreciation, meaning residential real property would start being fully depreciated over 27.5 years in equal increments. Furthermore, the ability to marry your real estate losses against your other active income was capped at $25,000 for non real estate professionals.
However, those individuals who could prove that they qualified as real estate professionals could still deduct an unlimited amount of real estate losses against their other active income.
Expenses and Depreciation – Deductible expenses for investment properties include mortgage interest, maintenance costs, repair costs, handyman costs and any other reasonable expenses associated with operating a rental property.
As we mentioned before, you can fully depreciate the value of a residential property (excluding the appraised value of the land) over 27.5 years. That means you can depreciate an additional 3.64% of the appraised building value every year even though it is a paper loss versus an actual loss.
Deferring Capital Gains Taxes with 1031 Like-Kind Exchanges
A popular method to defer capital gains taxes is through Section 1031 “Like-Kind Exchanges,” commonly referred to as 1031 Exchanges. Typically, most owners will sell their current property before purchasing a new one in a 1031 Exchange; however, it is possible to also do the reverse and first buy a new property and then sell your old property.
The key is to complete your 1031 Exchange within the IRS stated timeframes.
45 days to identify target property or properties from the date that you close the sale of your previous property. You must formally state the property address you wish to buy. It can be multiple addresses.
180 days to close title on your new property starting from the date that you closed the sale of your previous property. The 180 days time limit is inclusive of the 45 days you are allowed to identify your target properties.
It is important to note that you can only defer all of your capital gains if you purchase a property of “equal or greater value.” If you swap for a less expensive property than the one you just sold, you will owe taxes on the difference. In other words, a partial deferral is possible.
Legislative Update: The 1031 like-kind exchange is effectively unchanged for real estate investors as a result of the Tax Cuts and Jobs Act. Only one very specific category of investor, the speculative “home flipper” who never actually rents out the property, is now excluded from doing 1031 tax deferred exchanges. Furthermore, this type of tax deferred exchange will no longer be possible for other types of property beginning in 2018 (i.e. asset types outside of housing and real estate).
NYC Real Estate Taxes for Condominiums and Co-operatives
Building Special Assessments – it’s interesting and important to note that apartment owners can add their pro rata share of most building assessments to their cost basis, especially when the assessment was levied for building upgrades or repairs. As a result, it’s very important to keep all letters from your building as proof, you never know when you’ll need it!
Can a condominium or homeowners’ association borrow money? Typically the answer would have been no, versus a co-op where it’s very common for the co-op to have a mortgage on the entire building. However, with today’s loosening financial standards, more and more banks have become willing to lend to condominium associations based on the condo board’s ability to levy and increase common charges. Certainly a troubling trend for many condo owners to consider.
421-a Tax Abatement – as of 2017, this is a currently expired but very popular tax abatement meant to encourage the development of underutilized land, with the caveat that development cannot occur on park land. This tax abatement holds back additional tax on the improvements, but still taxes the original structure.
The “core zone,” as defined by the New York City government, only receives a 10 year tax abatement. This zone has constantly expanded as more areas become gentrified. However, developments that occur outside of the core zone can have tax abatements up to 25 years!
J-51 Tax Abatement – this is an abatement that existing buildings can apply for when they make capital improvements. For example, if you repair your elevator, you may be eligible. There will be many grey cases here where it’s not entirely clear whether the work done was simply maintenance, or a capital improvement. An experienced real estate adviser will be able to tell you whether combining a paint job with a kitchen upgrade will make the combined project a capital improvement versus maintenance.
Star Abatement – this is a very popular tax abatement for primary residences in New York City that are not owned in a LLC. Keep in mind that this tax abatement can’t apply if you already have another tax abatement in place like the 421g. If you are eligible, this nifty abatement will reduce your tax bill by 17.5%!
NYC Real Estate Taxes, Gift Taxes and Estate Taxes
An individual can give away $14,000 in gifts to any individual of his or her choosing per year without incurring gift tax. That means a married couple can give up to $28,000 per year to someone, like each of their kids, under the annual gift tax exclusion amount.
If a married couple wishes to gift more than that amount to their child, they can still do so up to their estate tax exemption of $5.49 million per person, or $10.98 million per married couple. They will not owe gift tax up to that amount, but they must file a Federal gift tax return (IRS Form 709) if they gave someone more than $14,000 during the year.
Estate Tax – Please read our article about buying property as a foreigner in NYC to learn more about how the estate tax affects both US nationals and foreigners alike.
Non-Resident Aliens generally only have a $60,000 estate tax exclusion. However, income taxes and inheritance taxes are addressed by separate tax treaties with each country. Factors that can affect tax treatment for non-resident aliens include their domicile vs tax residence, which persons and what property is subject to tax by each country upon transfer and which party bears the burden of the tax.
Having a non-citizen spouse adds another layer of complexity to estate tax planning. The estate tax of a deceased spouse will depend on the citizenship of the surviving spouse. All jointly held property with a non-citizen spouse will automatically be assumed to be part of the gross estate of the deceased spouse who is a citizen. The only exception is if the executor of the estate can substantiate the contributions of the non-citizen spouse to the acquisition of the property. Furthermore, citizens with non-citizen spouses do not benefit from the same marital deductions. Also, the estate tax exemption is not portable among spouses if one of them is not a citizen.
Please take special note that New York is one of the few states that has its own estate tax. Furthermore, New York’s estate tax is more onerous in that if your estate exceeds the exclusion amount even by one dollar, the entire estate is taxed! New York is definitely not a friendly place to pass away!
Legislative Update: The Estate and Gift Tax remain a part of the US tax code after the passage of the Tax Cuts and Jobs Act. However, exemptions have been doubled to $11,200,000 for individuals and $22,400,000 for married couples. Inheritors will continue to receive the benefit of a “step up” in cost basis of the assets included in a decedent’s estate to fair market value. The annual exclusion for the Gift Tax has risen to $15,000 per year, not because of tax reform, but because of an inflation adjustment.
These changes will sunset for taxpayers who die after December 31, 2025. On January 1, 2026, the Estate and Gift Tax exemption will revert to roughly $5 million per person. This amount will be adjusted for inflation from 2011. If you are considering making making lifetime gifts since the federal exemption amounts sunset, you should consider whether the potential estate tax savings will outweigh losing the “step up” in basis of assets held to death. The Tax Cuts and Jobs Act directs regulations to be implemented which will protect against any additional exemptions used from being “clawed back” if a decedent passes away after the exemption sunsets.
Please remember that many states such as New York1, Connecticut, or Pennsylvania assess their own estate taxes which will not be affected by federal tax reform. Taxpayers who live in states with a state estate tax may wish to consider making lifetime gifts before the increased, federal exemption amounts sunset.
1New York’s Estate Tax encompasses not just the federal gross estate, but also any “includible gifts” that were made in the three years preceding death. Gifts aren’t includible if they were made while the decedent was a non-resident, if the gift was made before April 1, 2014, or if the gift consists of real or tangible property located outside of New York State.
How Does the Tax Cuts and Jobs Act Affect New Yorkers and NYC Real Estate Taxes?
In December of 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act, the most sweeping tax reform since 1986.
New Yorkers should understand that most of the provisions of the new tax law will sunset for individuals starting in 2026, while those affecting businesses are generally permanent.
While most New Yorkers will see a tax decrease as a result of the Tax Cuts and Jobs Act, a significant minority will also see their taxes increase starting with the 2018 tax year. This minority will most likely consist of high income employees receiving a W-2, high income small business owners not eligible for the 20% deduction1 in “qualified business income,” and those with large personal residences and high property taxes.
Deductions for state and local income taxes, as well as property taxes2, are now capped at $10,000. It’s interesting to note that New York does not allow for a deduction of federal taxes paid on New York’s tax return. As a result, the state and local tax (SALT) deduction limitation will really hurt some New Yorkers!
Note: despite the widespread resentment of the SALT deduction limitation by New Yorkers, most accountants we’ve spoken with have told us that the limitation won’t affect most NYC home owners much because they were previously being hit by the Alternative Minimum Tax3 (AMT) which disallowed their SALT deductions anyway. That’s because Congress did not include a Cost of Living Adjustment (COLA) when they enacted the AMT in 1969. As a result, while only 155 households hit the AMT threshold of $120,700 for single filers and $160,900 for married filers in 1969, by 2015 the IRS states that 4.4 million Americans paid the AMT. Needless to say, if you are buying the average $2 million property in NYC, you would have been hit by the AMT under the old tax law and not been able to deduct SALT anyway! The new AMT income thresholds are much higher: $500,000 for single filers and $1 million for married filers.
1Pass through companies (i.e. unincorporated entities such as LLCs, partnerships and S corporations) are allowed under the Tax Cuts and Jobs Act to deduct 20% of “qualified business income” from their taxable income. At a 37% top federal tax rate, the 20% deduction approximates a 29.6% top marginal tax rate. Only domestic business income qualifies and deductibility is restricted for taxpayers earning above $315,000 for married filing jointly and $157,500 for individuals, to be indexed for inflation. Above these thresholds, the deduction cannot exceed the greater of 50% of W-2 wages paid or 25% of wages paid plus 2.5% of the unadjusted basis of tangible depreciable assets used in the business. Furthermore, this deduction is not allowed for “specified service businesses” including businesses in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, businesses in which the principal asset is the reputation or skill of one or more of its employees or owners, and businesses involved in investing and trading in securities, partnership interests or commodities. Lastly, it’s important to note that multiple businesses are aggregated and the deduction is allowed against the total net qualified business income. This provision sunsets for tax years beginning in 2026.
2Please note that property tax deductions are capped only for personal residences. All expenses are still deductible for investment properties.
3The AMT is a highly complex, parallel tax system enacted in 1969 and revised in 1982 in order to ensure that even folks with many deductions paid some minimum level of tax. At the time, there were a small number of households who paid little to no income tax due to the many legal tax credits and deductions available then. The idea was to have the taxpayer do their taxes under both systems and pay the higher tax. The AMT is a 28% flat tax on your taxable income after adding back exemptions and other deductions. If your AMT tax is greater than your regular tax liability, you would have to pay the difference.
Individual Federal income tax rates are slightly lowered, and thresholds are raised for taxable years 2018 through 2025:
Single Taxpayer with Taxable USD Income Of
|Over||Up to||Tax||Plus % on excess||Of the amount over|
Married Filing Jointly with Taxable USD Income Of
|Over||Up to||Tax||Plus % on excess||Of the amount over|
Changes to tax deductions and credits:
The Standard Deduction has increased from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married filers. As a result, it’s projected that the number of Americans taking the standard deduction will increase from 70% to 85%.
The Personal Exemption of $4,150 has been eliminated.
The Child Tax Credit has been doubled from $1,000 to $2,000
Employment related moving expenses are now no longer deductible, except for active duty military personnel.
State and Local Income Tax, Sales Tax and Property Tax (SALT) Deductions are now limited to $10,000. Please keep in mind that because the AMT threshold is now higher, you may ironically now be able to take $10,000 of SALT deductions vs zero under the old tax code.2