Understanding the NYC Capital Gains Tax on Property Sales
Understanding the NYC Capital Gains Tax on Property Sales
Selling a property in New York City can be a complex process, and a significant part of that is understanding the potential tax implications. When you sell a property for more than you paid for it, you've realized a capital gain. This gain is subject to taxation at both the federal and state levels. For NYC property owners, this also includes a city income tax.
This guide breaks down the essential information you need to know about capital gains tax on a property sale in NYC, written in a clear, Q&A format.
What Is a Capital Gain?
A capital gain is the profit you make from the sale of a capital asset, such as a stock, bond, or, in this case, real estate. The capital gain is calculated as the difference between your adjusted cost basis and the net sale price.
Adjusted Cost Basis: This is the original purchase price of the property, plus any costs incurred during the purchase (like closing costs and transfer taxes) and the cost of any significant capital improvements you made over the years.
Net Sale Price: This is the final sale price of your property minus the costs associated with the sale, such as broker commissions, legal fees, and other closing costs.
Example:
You bought a condo in Brooklyn for $900,000.
You paid $15,000 in closing costs.
You spent $50,000 on a kitchen and bathroom renovation.
Your Adjusted Cost Basis is $900,000 + $15,000 + $50,000 = $965,000.
You sell the condo for $1,500,000.
Your closing costs as a seller are $100,000 (commissions, etc.).
Your Net Sale Price is $1,500,000 - $100,000 = $1,400,000.
Your Capital Gain is $1,400,000 - $965,000 = $435,000.
How Is Capital Gains Tax Calculated in NYC?
This is where it gets a bit tricky, as you're dealing with three separate tax entities: the federal government, New York State, and New York City. The good news is that for real estate, New York State and New York City treat capital gains as a form of regular income. This means the capital gains are added to your other income for the year, and your tax rate is determined by the total.
Federal Capital Gains Tax
Federal tax rates on capital gains depend on how long you owned the property.
Short-Term Capital Gains: If you owned the property for one year or less, the gain is taxed as ordinary income at your regular federal income tax bracket (which can be up to 37%).
Long-Term Capital Gains: If you owned the property for more than one year, the gain is taxed at a preferential rate of 0%, 15%, or 20%, depending on your income level.
Federal Exclusion Under Section 121
For most homeowners, the federal tax is significantly reduced or eliminated by the Section 121 exclusion. This allows you to exclude a portion of your capital gain from your taxable income.
Single filers: Can exclude up to $250,000 of the gain.
Married couples filing jointly: Can exclude up to $500,000 of the gain.
To qualify for this exclusion, you must have owned the home for at least two of the five years leading up to the sale, and it must have been your primary residence for at least two of the past five years.
New York State and New York City Capital Gains Tax
Unlike the federal government, New York State and New York City do not have a separate, lower tax rate for long-term capital gains. Instead, your capital gain is considered ordinary income and is taxed at your standard income tax rate.
New York State Income Tax: This is a progressive tax with rates that can range up to 10.9%.
New York City Income Tax: NYC residents pay an additional progressive income tax with rates that can go up to 3.876%.
The combination of federal, state, and city taxes can result in a significant portion of your profit going to taxes, which is why proper planning is crucial.
The "Other" NYC Property Taxes: Flip Tax & Mansion Tax
When discussing taxes on real estate sales in New York, you'll often hear about the "Flip Tax" and the "Mansion Tax." It's important not to confuse these with capital gains tax.
Flip Tax
A flip tax is a fee collected by a cooperative building from a seller at closing. It is not a government tax and has nothing to do with capital gains. The fee is a revenue source for the building, and it's used to fund its reserves for maintenance, repairs, and other capital improvements.
Who Pays? Typically, the seller pays the flip tax.
How Is It Calculated? The calculation varies by building. It can be a percentage of the sale price, a flat fee, a fixed amount per share (for co-ops), or even a percentage of the capital gain itself.
Is it Tax Deductible? No, the flip tax is not tax deductible, but it can be added to your cost basis to reduce your capital gains.
Mansion Tax
The Mansion Tax is a progressive transfer tax imposed on the buyer of residential real estate in New York City.
Who Pays? The buyer pays this tax, not the seller.
When does it apply? The tax applies to property purchases of $1 million or more. The rate starts at 1.0% and increases with the purchase price.
Is it Tax Deductible? Like the flip tax, it is not immediately deductible, but it can be added to the buyer's cost basis, which can reduce their future capital gains when they eventually sell the property.
Tips & Takeaways
Keep Meticulous Records: Retain all receipts for closing costs, broker fees, and any capital improvements you make to the property. These costs can be used to increase your adjusted cost basis and reduce your taxable capital gain.
Understand the Section 121 Exclusion: If the property is your primary residence, this exclusion is your most powerful tool for minimizing federal capital gains tax.
Don't Forget State and City Taxes: Unlike federal law, NYS and NYC tax your capital gains at your regular income tax rate. Plan accordingly.
Work with a Professional: Navigating these taxes can be complicated, and the rules and rates change over time. Consulting with a qualified real estate attorney and a tax professional is essential to ensure you are meeting all your obligations while maximizing your net profit.
Ready to sell your NYC property? Contact Yeo Real Estate today for an expert consultation and a seamless selling experience. We are here to help you navigate the market and understand every step of the process.