Here is a summary of the major tax categories when buying property in New York. Besides capital gains, there is also monthly property tax, income tax and estate (inheritance) tax.
Property tax is provided as a monthly amount with each property but paid quarterly. A rough guide is $1 per sqft per month but it varies with the apartment and building. For example, a 1000 sqft apartment may have monthly property tax of $1000. This is the second largest carrying cost after common charges each month (excluding mortgage).
Newer buildings usually have a tax abatement, which means a decreased property tax amount lower than the $1 per sqft per month example, during the first 10 years of the property's life. This is commonly known as a 421-A tax abatement. During the first 10 years, taxes typically increase every two years linearly and by year 10, it would be what taxes should be without the abatement.
This depends on the owner's income level but assuming the owner only has income from one property in the US, it should be around 20 percent of taxable income. It's important to note that the US allows annual depreciation of investment property. This depreciation is a phantom expense which would wipe out taxable income especially in the early years of ownership.
Estate (Inheritance) Tax
While US residents have estate tax exemptions, the exemption for foreign property owners is minimal. Hence inheritance tax is the biggest exposure for foreign buyers because it can be up to 50 percent of property value.
It is extremely important to get sound advice from a foreign buyer expert when structuring the purchase. There are simple ways or more complex ways, both of which would protect the owner's estate from estate/inheritance taxes.
Capital Gains Tax
Capital gains tax is the taxes levied on the profit arising from sale of the property. Assuming the owner has owned the property for more than 1 year, capital gains tax ranges from 22 percent (if property is held individually) to 40 percent (if property is held through an entity or company). Another area to get advice from an experienced tax attorney.
For primary residence owners, there is a capital gains tax exemption of $250,000 for individuals and $500,000 for married couples. To qualify, the owner must have lived in the property for at least 2 out of the previous 5 years.
For the tax matters above, we will refer clients to an experienced tax attorney who specializes in foreign buyers of Manhattan property.
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