If you plan on selling your apartment or brownstone in New York City, you’ll want to consider ways to reduce your tax exposure.
Capital gains tax is levied on the profit you make on your place and it varies depending on your income bracket. The good news is that you have some cushion: If the apartment you are selling is your primary residence and you have lived in it for at least the last two years or for at least two of the last five years, you won’t have to pay capital gains tax on the first $250,000 of your profit if you're single, or $500,000 if you are married.
For NYC's higher-priced properties, it’s very possible you would have capital gains in excess of those figures. The issue then becomes, how can you offset those gains to pay less tax?
[Editor's note: A previous version of the article ran in December 2017. We are presenting it again with updated information for March 2022.]
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Major apartment upgrades can be deducted
One way of offsetting capital gains is through capital improvements—so if you’ve made substantial renovations to your apartment or there have been major upgrades to the building, you can add these costs to what’s called your basis—the original purchase price of your apartment. This reduces your profit when you sell.
“You can increase your basis and lower your tax by making capital investments to your property so if you remodel your bathroom that’s deductible,” says Asher Rubinstein, a partner at Gallet Dreyer & Berkey with a focus on estate and tax planning. So if you spent $100,000 upgrading the bathroom or kitchen of the apartment you bought for $1,000,000 in 2010, your basis increases by the amount of that improvement.
“It is a capital improvement and you’ve lowered the corresponding tax,” Rubinstein says.
A new fridge or new appliances aren't capital improvements and neither are regular repairs—like painting or new carpeting you’ve installed over the years.
Deductions can include building-wide improvements
If you own a condo or co-op, you can also factor in your contributions to capital improvements in the building.
“The building passes the cost of those improvements on to the unit holders so if the building repairs the roof or facade, when it comes time to calculate your improvements that also applies to the building as well,” he says.
You can get this information from the building management but if the work was done a decade ago they may not have this readily available.
“It’s best that the owner keeps contemporaneous records because even if you sell it in a decade, if the IRS challenges any of those deductions it’s good to have it on file,” Rubinstein says.
The costs of selling your place can be deducted
Another deduction is the staging or paint work carried out in order to sell your place—what Rubinstein calls “the cost of the sale.”
“Improvements necessary to show the apartment like staging, furniture or art that you rent for staging, or painting that you do in order to sell the apartment could also be a deduction for the sale,” Rubinstein says. He adds that the commission you pay the agent can also be deducted.
A further deduction you can take is the closing cost from when you first purchased the apartment.
A charitable option if you’re not living in the apartment
If you are no longer living in your apartment, Rubinstein points out there’s a mechanism called a charitable remainder trust where tax is avoided through a commitment to give a charitable donation at the end of the trust term. This would typically work for townhouses rather than co-ops and condos. Rubinstein says you have to consider the value of the property or item going into trust, the expected appreciation, and the lifespan of the trust.
“We can then calculate how much the taxpayer can pull out in distributions each year as a beneficiary and and so long as there’s 10 percent left for the approved charitable beneficiary, the trust won’t pay tax,” Rubinstein says.
—Earlier versions of this article contained reporting and writing by Alanna Schubach.
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