Understanding Capital Gains Tax in NY Real Estate

Capital gains refer to the profit earned from selling a real estate investment. The tax paid on this profit is known as capital gains tax. The rate depends on various factors, including the holding period of the asset, the investor’s income level, and applicable state or federal regulations.

How to Calculate Capital Gains on Real Estate

To determine your capital gains tax liability, follow these steps:

1. Determine the Purchase Price (Cost Basis)

   • This includes the original purchase price, closing costs, and capital improvements made to the property.

2. Determine the Selling Price

   • This is the final sale price of the property, minus any associated selling expenses (e.g., agent commissions, legal fees).

3. Calculate the Capital Gain

   • Use the formula:

     Capital Gain = [Selling Price - Selling Expenses] - [Purchase Price + Purchase Expenses]
     

4. Adjust for Depreciation Recapture

   • If the property was a rental, depreciation taken over the years must be added back to taxable income, subject to a maximum tax rate of 25%.

5. Apply Tax Rates

   • If held for less than a year, gains are taxed as ordinary income (short-term capital gains).

   • If held for more than a year, apply long-term capital gains tax rates (0%, 15%, or 20%, depending on income level).

   
   

Example Calculation

• Purchase Price: $300,000

• Closing & Improvement Costs: $20,000

• Total Cost Basis: $320,000

• Selling Price: $500,000

• Selling Expenses: $30,000

• Net Sale Proceeds: $470,000

• Capital Gain: $470,000 - $320,000 = $150,000

• Tax Liability (assuming 15% rate): $150,000 × 15% = $22,500

How to Avoid or Minimize Capital Gains Tax

Investors can leverage several strategies to reduce or eliminate capital gains tax liabilities, including:

1. 1031 Exchange (Like-Kind Exchange)

A 1031 exchange, named after Section 1031 of the Internal Revenue Code, allows investors to defer capital gains tax by reinvesting proceeds from a property sale into another like-kind property within specific timeframes.

2. Primary Residence Exclusion

If the property was your primary residence for at least two of the last five years, you may qualify for a capital gains exclusion of up to $250,000 for single filers or $500,000 for married couples filing jointly.

3. Opportunity Zone Investments

By reinvesting capital gains into Qualified Opportunity Zones, investors can defer taxes and even reduce tax liability depending on how long they hold the investment.

4. Holding Property for Over a Year

Long-term capital gains tax rates (for assets held over a year) are lower than short-term rates, which are taxed as ordinary income. Holding an investment property for more than a year can significantly reduce the tax burden.

5. Deducting Capital Improvements

Investors can lower taxable gains by deducting the cost of capital improvements (e.g., renovations, additions) from the property’s sale price.

Current Capital Gains Tax Rates in New York & the U.S.

Federal Capital Gains Tax Rates (2024)

• Short-Term Capital Gains (held less than a year): Taxed at ordinary income tax rates (10% to 37%, depending on income bracket).

• Long-Term Capital Gains (held more than a year): Taxed at 0%, 15%, or 20%, depending on taxable income:

  • 0%: Up to $48,350 (single) / $96,700 (married filing jointly)

  • 15%: $48,531–$533,400 (single) / $96,701–$600,050 (married filing jointly)

  • 20%: Over $533,401 (single) / Over $600,051 (married filing jointly)

New York State Capital Gains Tax

New York does not have a separate capital gains tax but instead treats capital gains as regular income. The state tax rates range from 4% to 10.9%, depending on income level.

Net Investment Income Tax (NIIT)

An additional 3.8% NIIT applies to individuals with modified adjusted gross income exceeding $200,000 (single) or $250,000 (married filing jointly).

Tax Implications for Real Estate Investors

• Depreciation Recapture: If an investor depreciated a rental property, they may owe depreciation recapture tax upon sale, taxed at a maximum of 25%.

• Installment Sales: Selling property under an installment sale agreement (seller financing) allows investors to spread taxable gains over multiple years, reducing annual tax liability.

• Estate Planning Benefits: Heirs who inherit real estate benefit from a step-up in basis, potentially eliminating capital gains tax upon inheritance.

Conclusion

Capital gains tax is a significant factor for real estate investors, but strategic planning can reduce or eliminate the tax burden. Whether through 1031 exchanges, opportunity zones, primary residence exclusions, or long-term holding strategies, investors can optimize their returns while minimizing tax liability. Understanding federal and state tax obligations ensures compliance and maximizes investment profitability.

This blog post is provided for informational purposes only and should not be construed as financial, legal, or investment advice. While I am a licensed real estate professional in New York, I am not a financial advisor, attorney, or tax professional. Readers are strongly encouraged to consult with their own licensed attorney, CPA, or financial advisor before making any real estate investment decisions. All information is deemed reliable but not guaranteed and is subject to change based on market conditions, legal updates, or individual deal circumstances.