If you sell your New York home, you will be responsible for paying state transfer taxes as well as federal capital gains tax if it doesn’t qualify for the principal residence exclusion. The limitations on the amount of tax you pay directly relate to the proceeds of the home sale, since under both state and federal taxation, the tax rate applies to an unlimited amount of gain or value.
NY Transfer Taxes
The New York transfer tax covers any conveyance of real property within the state. Because the sale of your home constitutes a conveyance, you are responsible for paying a portion of the proceeds in transfer tax. As of publication, the New York Department of Taxation imposes the tax at a rate of $2 for every $500 of the home’s selling price. But if you sell your home for $1 million or more, an additional “mansion tax” of 1 percent will apply. New York holds the seller primarily responsible for paying all mansion and transfer taxes; however, if the seller fails to pay, the state will collect it from the buyer.
Federal Capital Gains
The federal tax law will also impose a capital gains tax on the sale of your New York home. All homes you own are capital assets and are subject to the capital gains tax. The tax only applies to the profit you earn on the sale of your home, which you calculate as the selling price minus the home’s tax basis on the date of the sale. However, if you use the home as your principal residence and satisfy other IRS requirements, you may be eligible to exclude some of the gain from tax.
Home Gain Exclusion
The exclusion is available to the New York homes you sell that you use as your main home for at least two years during the five-year period ending on the date of your closing. In addition, you must be the legal owner of that home for the two years. Therefore, if the home you sell is a rental, vacation or other investment home, the exclusion is not available and you are responsible for paying the tax on the entire gain. If you do qualify, the IRS allows single taxpayers to exclude up to $250,000 of the gain from the capital gains tax. But if you file a joint return and your spouse also satisfies the two-year residency requirement, you can exclude up to $500,000.
New York Home Basis
It is imperative that you calculate an accurate tax basis for your New York home for purposes of calculating the taxable gain. Your tax basis is the amount you purchase the home for plus the additional closing costs you incur. And if you make permanent home improvements to the home, such as building a garage on the property or renovating rooms in the home, you can increase the tax basis for the cost of those projects.