One of the most important aspects of owning real estate in New York is making sure you stay abreast of the rules pertaining to capital gains taxes so that you can make the type of prudent investment decisions that will maximize your long term wealth potential. Many people are surprised to learn that almost anything you own can be considered a capital asset by the IRS. And while, generally speaking, a taxable capital gain or loss is calculated based on the difference between what you paid for an asset and what you ultimately sold it for, there are some important details to factor in for real estate investments. Determining Real Estate Capital Gains When trying to estimate whether or not you will be subject to capital gains taxes on transactions involving real estate in New York, you should keep in-mind that the key determining factors pertain to both the length of time you’ve owned the property, and the purpose for which you used it. Also, the IRS calculates real estate capital gains based on the adjusted cost basis of any home you sell, not on what you initially paid for it. The cost basis of a home is the amount paid for the home, plus:
- the amount of money invested in repairs, maintenance, and improvements
- any costs associated with sale of the property – such as closing costs, commissions, etc.
As far as the effect the length of time you’ve owned a home is concerned, any real estate in New York that is purchased and sold within a year is subject to being taxed as ordinary income at the applicable 35% rate. In order to take advantage of reduced real estate taxes, you must maintain ownership of a home, or other property, for more than one year. However, the IRS allows exceptions to this rule for early sales resulting from unusual circumstance beyond your control, such as:
- unforeseen loss of employment
- divorce or separation
- natural disasters, or terrorism resulting in the lost of your home
- death, multiple births from a single pregnancy, and government seizure of your property
Early sales that do not include any conditions such as these may still qualify for reduced taxes calculated on a prorated formula tied to how long you actually lived in the home. Making Detailed Estimates For homes that have been your principal residence for at least two of the previous five years, home owners can exclude $250,000 in profits from capital gains calculations if filing as an individual, and $500,000 for married couples filing jointly. And the two years need not be a contiguous period of time. Other important considerations affecting capital gains on real estate in New York are:
- there is no limit of the number of times you can use the sale of your primary residence as the basis of avoiding capital gains taxes
- if the real estate in New York that you own is an investment property, then normal capital gains regulations apply
- any real estate in New York purchased through a 1031 exchange is not eligible for the $250,000 exemption
- like-kind exchanges are eligible for capital gains tax deferrals. This involves selling your investment real estate in New York and reinvesting the proceeds in a property of equal or greater value
Persons selling their home, or investment property should also be aware that a 3.8% tax now applies on those individuals with an adjusted gross income of more that $200,000, and $250,000 for married couples filing jointly. So while there are a few particularities to be aware of when trying to estimate capital gains taxes on real estate in New York, a little homework, and possibly some expert advice too, will position you to make the kind of determinations that minimize your exposure in this regard.