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NYC Real Estate Taxes – A Beginner’s Guide to NYC Real Estate Taxes

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!

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NYC Real Estate Taxes When Buying a Home

Mortgage Recording Tax 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. 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%

NYC Real Estate Taxes – A Beginner’s Guide to NYC Real Estate Taxes

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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.

Note: The lender also pays a tax of 0.25% of the loan amount. In commercial deals, lenders will often try to make the borrower absorb this cost.

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The Mansion Tax in NYC

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. 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.

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. 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!

Note: If you purchase a multi-family property with 4 legal units, you can avoid the Mansion Tax. However, you will be subject to a higher Mortgage Recording Tax if your loan amount is greater than $500,000.

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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.

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%

Note: If you sell within a 12 month time frame 2 or more residential units in the same building, NYC will view it as a commercial transaction and tax it at the higher transfer tax rate for commercial transactions. If this is an issue you have, please contact one of our seasoned real estate attorneys who have had success with appealing this. It is indeed possible to appeal this higher rate if you can demonstrate for example that the two units are truly one combined apartment. This may be a crucial consideration for owners who have combined apartments but have not legally combined them (i.e. they still receive two separate property tax bills and the city views them as two separate units).

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The Flip Tax in NYC

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.

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.

What is FIRPTA?

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.

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!

Note: While there are no tax shelters for the sale of second homes, you are free to change your primary residence and take advantage of this tax exemption.

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 passive income.

Note: While you can depreciate the value of the building, you cannot depreciate the value of land according to the IRS. With that said, condos are generally viewed as owning zero land even if the collective group of all condo owners in a building does indeed fully own the land.

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.

What does like kind mean? Fortunately for real estate investors, the IRS considers all real estate to be like kind. That means you can swap a farm for a commercial building and both are considered like kind!

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!

Note: Even if your building has a 421-a Tax Abatement in place, you should not be complacent as the assessed value will continue to increase if you do not dispute it. If your assessed value continues to increase while you have your abatement in place and you do not fight it, you may be in for a big tax surprise when the abatement ends! The process of disputing the assessed value of your property is called Tax Certiorari and there are many real estate law firms that specialize in this field. Feel free to contact one of our experienced real estate brokers for recommendations!

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.

Note: The Federal Gift Tax rate is 40%

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.

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!

Disclosure: Hauseit and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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