Making the decision to put your New York home on the market is a big decision with many moving parts. Many homeowners tend to focus on the listing price and their real estate broker commission without understanding the tax implications of the sale. However, the amount of tax liability can significantly decrease the net proceeds from the sale.
Here is everything you need to know about taxes when you sell your home.
Capital Gains Taxes
Capital gains taxes are arguably the most important tax liability that sellers should be aware of once they decide to list their home for sale. For the most part, taxes for capital gains are approximately 15% for New York Sellers. However, if the home is located in New York City, sellers may be responsible for an additional 10% percent, provided they are not eligible for any type of exemption. Capital gain taxes are reported on Schedule D of your taxes.
To calculate your capital gains taxes, you must consider the length of time that you owed the property, as well as the purpose of your ownership, specifically was it an investment property or your primary residence. The Internal Revenue Service (IRS) determines capital gains taxes by looking at your adjusted cost basis. This is defined as the price you paid for the property in addition to the cost of any repairs or improvements that you have made to the property and the expenses associated with selling your property, including closing costs, broker’s commission, etc.
Generally speaking, the higher your basis, the lower your profit will be, which ultimately reduces your tax liability, which is the ideal tax situation for most sellers. Also, keep in mind that if you end up selling your home for less than your basis, on your taxes you will incur a loss, Which is also typically beneficial for most sellers. However, keep in mind that losses incurred while selling your personal residence are not tax-deductible the same way they would be for an investment property.
Length of Time of Ownership
If your property has been your primary residence for two of the last five years, a single homeowner can deduct $250,000 from capital gains. If a married couple is selling the home, they can deduct up to 500,000 in capital gains.
In the event that you own your home for less than one year before selling it, You will be subject to what is called short-term capital gain. This means that you will be taxed at a 35% rate instead of enjoying the long-term capital gains tax rates and exemptions.
Unforeseen Circumstances Exemptions
However, there are exemptions to this rule if a seller has to sell their home early due to circumstances beyond the seller’s control or “unforeseen circumstance.: This can include divorce, separation, natural disaster, death, loss of employment, and so forth. Review IRS Publication 523 to get all the details regarding who qualifies for the unforeseen circumstances exemption.
Exemptions for Service Members
There is also an exemption in the tax code that allows service members to receive the exemption even if they have not resided in their property for two years. Additionally, instead of the normal 5-year calculations, service members are only required to have used their primary residence within the last 10 years. This is recognizing that service members are sometimes away on active duty.
1031 Like-Kind Tax Exemption
There is also an exemption built into the tax code that could potentially exempt you entirely from capital gain taxes. Named after the applicable IRS tax code, a 1031 exchange allows a seller to be exempt from capital gain taxes as long as they purchase a like-kind property with the proceeds of the sale. There are very strict requirements to take advantage of this tax exemption. Notably, the new home or property must be purchased within 180 days of selling the older property. An experienced real estate in New York can help you fill out the appropriate forms with the IRS so that you can take advantage of this valuable tax exemption. The 1031 exchange is used frequently by real estate investors. There is no limit to how many times property owners can take advantage of the 1031 tax exemption as long as the proper procedures are followed according to the strict IRS guidelines.
Additional Taxes Based on Income
You should also be advised that a person selling their primary residence or investment property in New York will incur an additional 3.8% tax if their adjusted gross income is higher than $200,000 for a single person or $250,000 for a married person.
Final thoughts
Notably, there’s no limit to the number of times that you can exclude capital gains taxes on your primary residence. An investment property does not enjoy this benefit. Instead, an investment property will be taxed at the normal capital gains rate. Additionally, real estate purchase via a 1031 exchange is not eligible for the $250,000 or $500,000 IRS tax exemption.
Overall, given the complexity of taxes when selling real estate in New York, it is worthwhile to do a little research to fully understand the tax implications of selling your personal residence or investment property.
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Authored by: Stanley Montfort
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