De-Mystifying the Capital Gains Tax in NYC Real Estate
By Miron Change Agent |
Published on February 21,2013 at 6:37PM
Capital Gains and NYC Real Estate:
Did you know that almost everything you own and use for personal or investment purposes is a capital asset? According to the Internal Revenue Service (IRS), capital assets include household furnishings, collectibles (i.e art, silver, gold, wine, books, stamps), homes, and stocks and bonds. In general, when a capital asset is sold, the difference between the amount you paid for the asset and the amount you sold it for is a capital gain or capital loss.
In real estate, capital gains are based not on what you paid for the home, but on its adjusted cost basis. In real estate transactions, owing capital gains tax depends on the use of the property and the length of time you have owned the property before selling. Gain from a property bought and sold within one year is taxed as ordinary income and can be taxed at the maximum rate of 35 percent. To benefit from the reduced tax rates, property must be held for more than one year.
The IRS indicates that only certain property is subject to capital gains tax. For example, the sale of a home that generates a capital gain for the seller is subject to capital gains tax. However, proceeds from the sale of personal property in the home, such as dishwashers, curtains, and lawn furniture are not considered appreciable investments and not subject to capital gains taxes. (Note, the proceeds from the sale of personal property are subject to personal income tax).
Please refer to this worksheet from Realtor Magazine to help you understand how capital gains tax is calculated.
Capital Gains Taxation in the United States
*The 2001 rates are listed first, the 2002–May 2003 rates second.
**The 8% rate is for capital gains from securities held for more than five years.
Note: Short term capital gains were taxed at the same rate as ordinary income for all years in the range of this table.
Capital Gains Tax in Action in New York City
Meet a pair of New Yorkers Christina and Jeff who have been married for 5 years. Unfortunately, Jeff lost his job in the Financial District last year and relocated his family to Connecticut to accept a new position. They ended up selling their Greenwich Village Pre-war two bedroom and made a profit. Christina and Jeff had lived in the NYC property for 2 years as their primary residence.
How does Capital gains work in this specific situation? Because of the capital gains home-sale exemption, the profits Christina and Jeff earned on the sale of their downtown NYC apartment are NOT taxed. Christina and Jeff can use their profits to spend anyway they want and they won't have to pay a penny to the IRS.
Special Exemptions and Considerations:
Capital Gains Home-Sale Exemption. With this exemption an individual can exclude, from his or her gross income, up to $250,000 in capital gains ($500,000 for a married couple filing jointly) of any profits from your capital gains taxes. But you must have lived in the home as your primary residence for 2 out of the last 5 years. The two years of residency do not have to be continuous. You also have not sold or exchanged another home during the 3 years preceding the sale. And lastly, you need to meet what the IRS calls “unforeseen circumstances,” such as family medical emergency, divorce, job loss. There are also allowances and exceptions for military service, disability, partial residence and other reasons. Consult your tax advisor.
You can add capital improvements (money spent on improving the value of your home) to the cost basis of your home. This in turn, lowers the total profit you pay taxes on.
If the house is an investment property, then regular capital gains rules apply. However, you can make investment property eligible for the exclusion by living in it for at least two years, which do not have to be continuous.
There is no limit to the number of times you take the home-sale exemption from your capital gains taxes.
The $250,000 ($500,000 for a married couple) is not available to properties bought by 1031 exchange.
Like-kind exchange. You can also minimize tax consequences from the sale of investment property by doing what is known as a 1031 tax free exchange. When sell your property, if you pour the money into another investment property of equal or greater value, you can defer those capital gains taxes. Note: real property in the U.S. and real property outside the U.S. are not like-kind properties for tax purposes.
Effective January 1st, 2013, the Capital Gains tax could affect many real estate transactions. Beginning the first of the year, a 3.8% tax on some investment income will take effect. The tax will NOT apply to all real estate transactions, rather it will apply to two scenarios: (1) Individuals with adjusted gross income (AGI) above $200,000 and (2) Couples filing a joint return with more than $250,000 AGI.
Go here for more information from National Association of Realtors.
Before considering any real estate investment, it's a good idea to seek tax advice and plan on a long-term, rather than a short-term, commitment.
All material herein is intended for information purposes only and has been compiled from sources deemed reliable. Though information is believed to be correct, it is presented subject to errors, omissions, changes or withdrawal without notice. Miron Properties is a licensed real estate broker in New York City.