When selling a home or another type of real estate property in New York, it is essential to understand local and state taxes. Tax Shark can help you navigate capital gains taxes in New York and help you understand how they affect your closing costs after selling a property.
What is the Capital Gains Tax on Property in New York?
When selling real estate property in New York, the sale may be subject to up to three layers of capital gains taxes in addition to other taxes, such as transfer taxes. They include federal capital gains taxes, state-level taxes, and New York City-specific taxes.
Federal Capital Gains Taxes
Rate: Varies from 0% to 28%. The most common rate is 15%.
The Internal Revenue Code (IRC) states that all taxpayers owe taxes to the federal government on all capital gains realized each year (26 USC 1).
According to IRS Topic 409, real estate property counts as capital assets. This factor means that gains realized from selling real estate property, such as selling a house, are a type of capital gain.
Capital gains are a positive difference between the sale value and the purchase of your real estate property. In other words, if you sell a house in New York for more than you bought it for, you will owe taxes on the difference.
The specific amount of federal capital gains taxes owed depends on two primary factors: the time you held the property and your taxable income.
- If you held the property for one year or less before selling and realizing a gain, the IRS considers it a short-term capital gain. The capital gains taxes owed depend on your income tax rate at the time of the sale.
- If you held the property for more than one year before selling and realizing a gain, the IRS considers it a long-term capital gain. The tax rates for long-term capital gains depend on your filing status and yearly income.
Taxpayers who realize a capital gain on the sale of a house will pay one of three standard tax rates: 0%, 15%, and 20%. Although IRS Topic 409 describes three exceptions to the rules, where taxpayers are required to pay rates of more than 20%, they do not apply to real estate sales.
The federal capital gains tax rate is 0% if your filing status is:
- Single or Married Filing Separately with an income of $41,675 or less.
- Married Filing Jointly or Qualifying Surviving Spouse with an income of $83,350 or less.
- Head of Household with an income of $55,800 or less.
The federal capital gains tax rate is 15% if your filing status is:
- Single with an income of more than $41,675 up to $459,750.
- Married Filing Separately with an income of more than $41,675 up to $258,600.
- Married Filing Jointly or Qualifying Surviving Spouse with an income of more than $83,350 up to $517,200.
- Head of Household with an income of more than $55,800 up to $488,500.
The federal capital gains tax rate is 20% if your filing status is:
- Single with an income of more than $459,750.
- Married Filing Separately with an income of more than $258,600.
- Married Filing Jointly or Qualifying Surviving Spouse with an income of more than $517,200.
- Head of Household with an income of more than $488,500.
New York State Capital Gains Taxes
New York does not differentiate between long-term and short-term capital gains for taxation purposes. The state instead taxes capital gains as regular income, using the state’s ordinary income tax rates for both. If you are a New York resident and realize capital gains in the state, you’ll pay taxes according to your income and filing status.
According to the New York State Department of Taxation and Finance, state income tax rates are divided into three tiers:
- Residents with an adjusted gross income (AGI) of $107,650 or less and a New York State taxable income under $65,000 must refer to the New York State tax tables.
- Residents with an AGI of $107,650 or less and a New York State taxable income of $65,000 or more must use the state tax rate schedule to calculate income taxes owed to the state.
- Residents with an AGI exceeding $107,650 must calculate their taxes using the tax computation worksheet.
New York City Capital Gains Taxes
Residents of New York City who realized capital gains owe taxes to the city in addition to state and federal capital gains taxes. Like state-level taxes, New York City levies taxes on capital gains using the income tax rates.
New York City resident income tax rates are divided into two tiers:
- NYC residents with a New York State taxable income of less than $65,000 must use the New York City tax tables.
- NYC residents with a New York State taxable income of $65,000 or more must use the NYC Tax rate schedule to calculate income taxes owed to the city.
What is the Capital Gains Tax Exclusion in New York?
Because New York taxes capital gains using income tax rates, residents should generally expect to pay state-level taxes on capital gains. The state offers no specific state-level exclusions like those offered by the federal government, such as exclusions for sales of primary residences.
New York Capital Gains Rate vs. Other States
New York is one of a handful of states that taxes capital gains as ordinary income. Other states include California, Kansas, and North Carolina.
California
Like New York, California taxes all capital gains as income using the state’s regular income tax brackets. California uses a progressive income tax bracket system.
Example: Josh is single and lives in San Diego, CA. He earns $220,000 in adjusted gross income annually and files as single. Normally, he would owe $17,213 in income taxes to the state.
However, he sold a real estate property during the year and realized a $32,500 gain on the sale. This sale means that for this year, California will tax him as though he earned $252,500. Consequently, he will pay $20,236 in income taxes.
If Josh had been a resident of Syracuse, NY, his AGI would have been above the $107,650 threshold outlined in New York state income tax legislation. This income level requires him to use the NYS tax computation worksheet 8 (single, AGI over $215,400 but not more than $1,077,550, taxable income is more than $215,400 but not more than $1,077,550) to calculate his state income tax.
In this case, Josh would owe the state of New York $15,102 in state income taxes.
Kansas
All capital gains realized in Kansas are taxed as income. The state uses a six-tiered individual income tax system for residents: three tiers for married residents filing jointly and three more for all other residents.
Example: Maureen and Peter are a married couple living in Overland Park, KS. The couple earns $105,000 annually, and their filing status is Married Filing Jointly.
Per the Kansas Department of Revenue, the couple would normally owe $2,505 plus 5.7% of excess over $60,000 (in this case, 5.7% of $45,000), equal to a total of $5,070.
This year, the couple sold a house and realized $80,000 in capital gains, meaning they will owe taxes as though they earned $185,000. Therefore, the couple owes $2,505 plus 5.7% of $125,000 ($7,125), equal to $9,630.
If Maureen and Peter had been residents of Albany, NY, their AGI would have been over the $107,650 threshold outlined in New York state income tax legislation.
They would need to use the NYS tax computation worksheet 2 (married filing jointly, AGI more than $161,550 but not more than $25,000,000, taxable income more than $161,550 but not more than $323,000) to calculate their state income taxes. In this situation, the couple pays $9,639 in New York state income taxes.
North Carolina
North Carolina taxes all capital gains as income with the state’s flat income tax rate system. For Tax Year 2023, the individual income tax in North Carolina is 4.75%.
Example: Quincy is single and lives in Raleigh, NC. He earns $90,000 annually, meaning he normally owes $4,275 to the state. However, Quincy sold a home that year and realized a gain of $50,000 on the sale. Therefore, Quincy owes income taxes as though he earned $140,000 that year, or $6,650.
If Quincy had lived in Utica, NY, at the time instead, the house sale would have increased his AGI over the $107,650 threshold in New York state income tax legislation.
He would have needed NYS tax computation worksheet 7 (single, AGI over $107,650 but not over $25,000,000, taxable income $215,400 or less) to calculate his state income taxes. He would have had to pay $7,830 to the state of New York in income taxes.
Short-Term vs. Long-Term Capital Gains Tax Rate in New York
New York does not differentiate between short-term and long-term capital gains. No matter how long the taxpayer held the property, all capital gains realized are taxed according to the state’s income tax rates.
Nonresident Capital Gains Tax Rate for New York
According to the New York State Department of Taxation and Finance, nonresidents must pay tax on what the state calls “New York source income.”
Typically, source income includes earnings from work performed in the state and income from New York real property. However, Tax Bulletin IT-615 specifies that nonresident New York source income also includes gains from sales or transfers of real or tangible property in New York.
Selling a property in New York as a nonresident and realizing capital gains from the sale is taxed using the state’s income tax rates. The tax also applies to foreign citizens trading real estate in New York.
Nonresidents must use Form IT-203 to pay income taxes in New York. The New York nonresident income tax rates are as follows:
- If your adjusted gross income in New York State is $107,650 or less AND the taxable income is less than $65,000, use the IT-203 Tax Tables to calculate your liability.
- If your adjusted gross income in New York State is $107,650 or less AND the taxable income is $65,000 or more, refer to the New York State IT-203 tax rate schedule to determine your liability.
- If your adjusted gross income in New York State exceeds $107,650, you must use the IT-203 tax computation worksheet to calculate your tax liability.
How the Capital Gains Tax is Calculated in New York
New York taxes capital gains realized in the state as income taxes. Therefore, a New York state resident realizing capital gains on the sale of a house will owe state income taxes. They vary depending on the gain realized, the resident’s filing status, and income level.
New York City residents will owe additional taxes on top of the federal and state-level taxes. NYC also taxes capital gains using income tax rates.
How to Avoid Capital Gains Tax in New York
Depending on your filing status, the value of your home, and other elements, state and federal laws may contain real estate tax exemptions that allow you to reduce or avoid paying capital gains taxes in New York.
Strategy #1 - Section 1031 Exchange
While federal law generally requires you to pay tax on capital gains at the time of the sale, Section 1031 of the Internal Revenue Code outlines an exception allowing you to postpone paying federal capital gains taxes.
If you reinvest the proceeds of your capital gains into a similar property as part of a qualifying like-kind exchange, you may qualify for a tax deferral known as a Section 1031 exchange.
Since the passage of the Tax Cuts and Jobs Act, Section 1031 exchanges only apply to real property; intangible and personal property does not qualify.
The IRS defines “like-kind properties” as properties that have the same essential nature or character, regardless of quality or condition. For example, an apartment building is like-kind to another apartment building but may not be like-kind to a two-family home.
Additionally, regardless of the type, property in the United States cannot be like-kind to property outside the United States.
Example: Mr. Markinson owns a multi-family home worth $1,700,000 in Buffalo, NY, as an investment property.
He has located a different multi-family home in Albany, NY, of equivalent value and completed a Section 1031 like-kind exchange, selling the Buffalo home and acquiring the Albany property in exchange. The exchange allows him to avoid paying federal capital gains taxes.
Strategy #2 - Primary Residences (Section 121 Exclusion)
According to IRS Topic 701, if you realize a capital gain on the sale of a home, you may qualify for a Section 121 Exclusion from federal capital gains taxes.
The name refers to Section 121 of the Internal Revenue Code. This rule allows taxpayers who realized a capital gain on the sale of their primary residence to deduct up to $250,000 (or $500,000 if married and filing jointly) of that gain from their taxable income.
To qualify for a Section 121 Exclusion, you must pass ownership and use tests:
- Ownership test: You must have owned the home for at least two years.
- Use test: You must prove you used the home as your primary address for at least two years.
Additionally, you must pass both tests within a five-year period prior to the sale, and you must not have applied a Section 121 Exclusion to another property in the last two years.
Example: Maria is a single taxpayer who has owned and lived in a one-family home in Yonkers, NY, for nine years.
She originally purchased the property for $100,000. Maria decides to sell the home for $134,000 after nine years of using the home as her primary residence, realizing a capital gain of $34,000.
However, due to the time she spent owning and using the property, she qualifies for a Section 121 Exclusion, which lets her deduct up to $250,000 of the gains from her federal taxable income.
Because the gains are under that threshold, Maria can avoid paying federal capital gains taxes, leaving only state taxes to pay.
Because Maria earns $115,000 a year, she will be taxed as if she earned $149,000 that year, meaning she must use the New York State tax computation worksheet to calculate her state taxes.
Strategy #3 - Stepped-Up Basis
A stepped-up basis is an adjustment of the cost basis of an inherited asset. The cost basis of an asset is equal to its purchase price plus the value of any capital improvements done. For example, a real estate property that received new, valuable permanent fixtures or home improvements since the date of purchase has received a capital improvement.
A taxpayer who inherits a home from a family member benefits from a stepped-up basis if they decide to sell the home. Instead of paying capital gains taxes based on the difference between the original purchase price and the sale price, the stepped-up basis effectively “resets” the original purchase price to the fair market value at the time of the benefactor’s death.
The step-up in basis rule can help significantly reduce the amount of federal capital gains taxes owed, but only for taxpayers who have inherited the property they intend to sell.
Example: Gabriel is the grandfather of Linda and the owner of a single-family home in Ithaca, NY. This year, Gabriel passed away.
His will names Linda as the recipient of his home, making Linda the beneficiary and Gabriel the benefactor. When Gabriel originally purchased the home in 1954, it was worth $20,000. Today, its fair market value is $205,000.
When Linda decides to sell the home, she obtains $230,000. Normally, she would have realized a capital gain of $210,000.
However, the stepped-up basis rule adjusts the home’s cost basis to its fair market value of $205,000, meaning Linda will only owe capital gains taxes on $25,000.
How to Report Your Home Sale in New York for Capital Gains Taxes
To report your home sale for capital gains, you must complete two IRS forms: Form 8949 and Schedule D Form 1040.
First, report in Form 8949 whether the transaction corresponds to a short-term capital gain (you held the house for one year or less) or a long-term one (you held it for over one year).
- For short-term gains, check Box C in Part 1, then fill out the property information under that section.
- For long-term gains, check Box F in Part 2, then enter the property details under that section.
If you realize a gain from the property that can be excluded, enter the letter “H” in column (f), then write the corresponding amount in parentheses and as a negative number in column (g).
After completing Form 8949, enter property information in the corresponding areas of Schedule D Form 1040.
What About Selling a New York Home You Inherited?
If you sell a home you inherited, you may benefit from the stepped-up basis rule. This rule lets you pay capital gains taxes on the difference between the final sale price and the property’s current fair market value instead of its original purchase price.
The difference can significantly reduce the amount of capital gains taxes you owe, especially if the home’s value has significantly appreciated since the original date of purchase.
FAQs
Here are the answers to some common questions about capital gains taxes in New York when selling a residence.
Yes, when you sell a home that is not a primary residence, you will have to pay capital gains tax unless you invest in another property of around the same value to rent out.
It depends on where the money you used to purchase the home came from. If you used a 1031 exchange, you might still owe capital gains tax.
You must have lived in the house for two years within the last five years of the sale.
There is no exemption from paying capital gains taxes in New York based on the taxpayer’s age.
You cannot avoid the capital gains tax but can defer it by investing in similar property.
