With your children purchasing their own homes and starting their own families, you may finally decide that the time is right for you to sell your Long Island home. However, you should consider how the NYS capital gains tax could affect your sale before you proceed with any purchase.
The capital gains tax does not get discussed often. That is a big part of why it tends to catch sellers off guard.
Learning more about the capital gains tax is crucial if you want to make the best decision regarding your Long Island property. Continue with this article so you can gain a better grasp of that complex topic.
What Is the Capital Gains Tax?
The capital gains tax is a payment the government collects from individuals after they sell certain investments. They regard the investments in question as capital assets. Only the most valuable possessions are capital assets. Examples of capital assets include stocks, bonds, cars, collectibles, and real estate properties.
For this article, we will focus on the capital gains taxes that are levied on the sales of real estate properties. To find out how much you owe the government after you complete the sale of one of your properties, you need to consider the amount you paid for a property and the price you eventually sold it at.
Let’s put forth a potential scenario so we can understand the capital gains tax even better.
If you bought a home years ago for $200,000 and sold it recently for $1,000,000, the government will not take their share from that complete amount. Instead, they will only tax your gain from that particular transaction. Even then, there are still exceptions that will come into play that can lower your tax bill.
Exemptions from the Capital Gains Tax
The government grants certain exemptions from the capital gains tax. The type of exemption you get will depend on your civil status.
According to the IRS, sellers may exclude a portion of their entire capital gain from a transaction. If you are single and the capital gain from selling your home is no greater than $250,000, it excludes you from paying the capital gains tax. They will only tax your capital gain that exceeds that $250,000 threshold in that scenario.
The $250,000 threshold only applies to taxpayers who report sales as individuals. The government will exclude married couples who reap capital gains from paying the tax as long as their profit does not exceed $500,000.
Qualifying for the Capital Gains Tax Exemptions
The exemptions from the capital gains taxes probably sound appealing. They may encourage you to push through with the sale of your property. Before you make any final decisions, you need to know that not everyone is qualified for those exemptions.
The IRS requires taxpayers to pass both the ownership and the use test before they can take advantage of the exemptions we discussed previously.
If the property you recently sold was not your main place of residence, then that means you cannot pass the ownership test. In all likelihood, you will not qualify for the exemptions if you sold a home that you only inherited recently.
To pass the use test, you must prove that you were living in that home for at least two out of the five years before the date you sold it. Notably, you do not need to spend those two years consecutively inside that property. You can tally up the days you spent living in that home when you file for the exemption.
So, what are your options if you do not qualify for the exemptions based on the ownership and use tests? Well, you can check if they can grant you an exemption based on other factors.
Members of the Foreign Service, the Intelligence community, and the Uniformed Services may receive the exemption. You may also qualify for the exemptions if you were recently divorced or if your spouse passed away.
There are additional factors that could make you eligible for one of the exemptions. If you do not qualify based on the ownership and use tests, consult with a realtor or a home buying company in your area to check if you may snag an exemption differently.
Situations Where You Must Pay the Capital Gains Tax
Taking advantage of exemptions could help you avoid hefty tax payments if you recently sold your home. However, as mentioned above, we already know that exemptions do not always apply.
What are the situations where individuals must pay the capital gains tax? Let’s go through them below.
You Failed the Ownership and Use Tests
We already touched on this above, but you cannot cite any exemptions if you do not pass the ownership and use tests. Prepare for a substantial tax payment if you find yourself in that situation.
You Used the Exemption within the Last Two Years
Property owners will also be disqualified from using a capital gains tax exemption if they used it recently. To be more specific, the law dictates that property owners cannot use that exemption within a period of two years.
Make sure you keep that rule in mind when planning to sell your home. Carefully time your transactions to take full advantage of the exemptions granted to taxpayers.
You Are Obligated to Pay the Expatriation Tax
Per the IRS, citizens of the United States who have renounced their citizenship and long-term residents who ended their resident status due to tax-related reasons are obligated to pay the expatriation tax. Your expatriation tax obligations will change based on when you became an expat. In addition to the expatriation tax, you will also need to pay the capital gains tax if you sell properties you have in the United States.
What Are the Capital Gains Tax Rates in New York State?
Next up, let’s discuss the capital gains tax rates. Similar to how the exemptions work, the capital gains tax that you owe the government will change based on how long you owned the property before you sold it.
Short-Term Capital Gains Tax Rate
The short-term capital gains tax rate applies if you sold a property that you owned for less than a year. The tax rate for short-term capital gains is more variable. It will vary based on which tax bracket you fall under.
Some taxpayers may have a short-term capital gains tax rate of up to 37%. Given how onerous the short-term capital gains tax rate is, you may be well-served to hold up on selling your property.
Long-Term Capital Gains Tax Rate
Compared to the short-term capital gains tax rate, the long-term capital gains tax rate is often more affordable and predictable. The New York State capital gains tax rate for long-term properties typically settles at around 15%.
You may need to pay more than a 15% tax on your long-term capital gains based on where you live. Residents who live near New York City may pay close to 25% once they account for all factors.
How to Avoid NYS Capital Gains Tax
If you are truly looking to avoid paying capital gains tax when selling your home, the best option would be to hold the note when you sell. Holding the note is also known as seller financing, owner financing, or purchase-money mortgage. What happens, in this case, is the seller becomes the “bank.” A real estate investor or person enters a real estate agreement with the seller, but the seller holds the mortgage in their name.
Some benefits to seller financing are:
You can receive top dollar for your home (sometimes even well over the asking price).
You can receive monthly cash flow without worrying about property maintenance, tenants, turnovers, etc.
You avoid NYS capital gains tax from selling outright.
You avoid paying closing costs (the national average cost to sell a home is 10% of the purchase price when you factor in broker fees and closing costs).
You are released from paying property taxes as this is the buyers’ responsibility now.
The banks don’t make the money. The seller and the buyer (if they’re going to rent it out) are the only ones who will make money from this transaction.
The terms are negotiable (i.e. down payments, interest rates, years until the balloon payment must be paid off, etc)
The main reasons why some will not seller finance:
They do not understand the process and don’t care to learn it.
They need a large lump sum of money for relocation or a major life event.
They are worried the buyer will not make the payments.
This can be easily remedied by having specific clauses in the agreement, such as no foreclosures, no evictions (as they can take years to process), after X amount of months without payment they must forfeit the home, etc.
How Can You Reduce Your Capital Gains Tax Payments?
Many property owners are hesitant to sell their homes out of fear that the capital gains tax will eat into their profits too much. Thanks to exemptions and other loopholes, you may not owe any tax payments, or it could be smaller than you thought it would be.
Of course, some property owners still need to make substantial capital gains tax payments. If you fall into that group, you may be wondering if there are things you can do to lessen your obligations.
You will be glad to know that reducing your capital gains tax payments is possible. Check out the tips detailed below and see which ones you can use to reduce your tax payments.
Offset Your Capital Gains with Capital Losses
Not all capital assets that you eventually sell are guaranteed to yield profits.
Some of them may have depreciated while you owned them. You may end up selling an asset for a price lower than what you originally paid. In that scenario, you have incurred something known as a capital loss.
Sustaining a capital loss is obviously not ideal, but it could be a useful tool for you later. If you manage to realize capital gains from the sale of a property, you can use your earlier losses to offset your tax bill. Your once hefty tax bill may look significantly lighter because of those previous losses.
Move to a Different Part of New York State
Earlier, we mentioned that you may pay additional taxes depending on which part of the state you call home. If you live in an area with an elevated tax rate, you can expect your capital gains tax to be on the high side as well.
You may not be too keen on paying a higher tax simply because of your address. In that case, moving to a different city could help you lower your taxes. Partner with a direct home buying company so you can sell your property and move to a different part of the state within a relatively short time.
Avoid Entering a Higher Tax Bracket
Income tax rates will affect your capital gains tax. New Yorkers who earn a lot of money are obligated to make substantial capital gains tax payments.
Right now, your income level may put you in a tax bracket that does not need to deal with sky-high taxes. That may change if you receive a promotion to a higher-paying position. Whatever additional income you make may be offset by your tax payments. You may be affected even more than the average taxpayer if you also have plans to sell a property sometime soon.
Time your sale to avoid entering a higher tax bracket before finalizing the transaction.
Prove That You Paid for Home Improvements
The cost basis factors into the calculation of the capital gains tax, so you want that to be accurate. The cost basis for the property you are looking to sell may be inaccurate. The cost basis may be inaccurate because you had to pay for numerous repairs shortly after originally purchasing that property.
You can point to those repairs as to why your capital gains tax should be lower. Hopefully, you have all the receipts and transaction records for those repairs on hand. They will prove useful as you attempt to reduce your tax obligations.
Use a Trust to Reduce Your Tax Obligations
Reducing your capital gains tax payments is also possible through careful estate planning. By setting up a trust, you can effectively shield your assets from different taxes.
The key here is to create the right type of trust. Work closely with an estate planning attorney and let them help you create a trust that will work best for your assets.
Utilize 1031 Exchanges
Using a 1031 exchange also gives property owners another way to avoid substantial capital gains tax payments. In 1031 exchanges, you basically swap one property for another. You can do that by using the proceeds from your sale to buy a similar property.
These exchanges can be tricky, and they are also limited in scope since they are only allowed for business and investment properties. Even so, you can defer tax payments if you can pull off this exchange properly. You may need to pay the capital gains tax eventually, but you can push that obligation farther into the future by using a 1031 exchange.
Sell your Long Island property without much issue by partnering with a direct home buying company. Reach out to us at House Buyers LI so you can move your property without getting bogged down by the often troublesome selling process.
It’s not unusual for children to inherit property when a parent dies, but what happens when your new real estate is more than you can handle? If you’ve suddenly inherited a house but you aren’t willing or able to hang on to it, the simple solution is to sell it off, right?
It might be if you’re the sole owner, but if you share an inherited property with your siblings, things have just become a bit more complicated.
Parents can and do name multiple children as inheritors of their property; even when a person dies without a will, many children may still find themselves inheriting property and other assets. And while this may seem like a great boon in some ways, it also has the potential to cause some problems such as:
Sudden financial obligations
Potential tax liabilities on a sale
Financial or personal stress from attempting to manage the property
Confusion over what you can and should do with the property
Familial rifts, anger, and resentment
Court battles (and associated costs) if the shared owners can’t come to an agreement
A forced sale, which may result in the house going to auction or selling for a lower price than it is worth
If you are inheriting a house in conjunction with your siblings, you may find yourself experiencing one or more of these issues. One of the best ways to deal with them is collecting pertinent knowledge that will help you come to the best decisions about your property. Let’s begin by understanding what you can do with inherited property.
What You Can Do with Inherited Property
If you have inherited property from your deceased parents, there are three things you can do with it. Each presents its own benefits and drawbacks.
Move into the home
If you or one of your siblings decides that they would like to move into the family home as a primary residence, you may want to consider the buyout option. In this scenario, the sibling who wants to own the home will essentially buy their siblings’ shares of the house. Be warned that this may come with additional costs such as mortgage payments, maintenance expenses, fees, and more, as well as yearly property taxes.
Rent out the property
Perhaps you and your siblings already have homes but aren’t interested in selling your family property right now. If this is the case, you may want to consider renting the house or property. Be aware that this option may require a lot of work and financial investment to get the property renter-ready and to provide maintenance and property management. There are also certain risks associated with rental properties that you will want to be aware of, such as destructive or malicious tenants, tenant gaps, and more. You may find that the rent money you pocket every month, when split between all the owners of the property, is not worth it.
Sell the property
Selling and splitting the profits is one of the most popular ways to take care of inherited property. Keep in mind that you may still have to cover some costs associated with the sale, as well as potential capital gains tax once the sale is complete. If you’re looking to save money on fees, commissions, and repairs, utilizing professional real estate buying services such as House Buyers LI will not only cut back on costs but will also help you close the deal quickly.
Can Siblings Force the Sale of Inherited Property?
The answer is yes, it is possible for one heir to force the sale of a shared inherited property by filing a partition with the appropriate court. It’s important to note that this is a last-option resort, as forcing a sale can be expensive, time-consuming, and may not turn out exactly the way you want it to.
Before forcing a sale, it’s important to try other measures.
Four Steps to Selling an Inherited Property
If you are inheriting a house or property and are not interested in keeping it, there are four main steps to the selling process.
Step 1: Probate
As a beneficiary, before you can receive your inheritance, you’ll have to experience the legal process of probate. This is the process during which a will (if there is one) is filed, creditors who have a claim against the decedent come forward, all outstanding debts are settled, and interested parties or beneficiaries are notified that they have been named to inherit.
You should receive a probate notice from the executor of the will after it has been validated. Once assets have been properly appraised, they will be distributed in accordance with the will or intestacy laws.
Let’s look at an example.
Your father passes away, leaving his property to you, your brother, and your sister. The three of you will receive a probate notice informing you of your standing in the will. Because the inherited property is valued at $300,000 and is to be divided equally, each of you will own a third of it, or $100,000 worth of the property.
Step 2: Property Appraisal
After assets have been distributed and you and your siblings inherit property, do take the time to get a property appraisal. This might mean the difference between an easy and unified sale or a long court battle.
During the property appraisal, your appraiser will find out approximately how much the inherited property is worth by comparing it to similar properties and taking note of its present condition.
Once you have a dollar amount, it will be easier to talk to your siblings about selling the property because you will all know how much it is worth and what you’re likely to receive for it. Providing solid numbers and data can be a powerful negotiating tool for siblings who are on the fence about selling, as they are more likely to be swayed if they know what they stand to gain in the event of a sale.
Step 3: Discuss Property Options
If circumstances allow, one of the most important things you can do is open up a discussion with your siblings concerning the future of the property. A calm discussion can mean the difference between peacefully reaching a conclusion that everyone is happy with or a long and expensive court procedure.
During these discussions, be sure to talk about the benefits and risks associated with every option available to you (i.e., selling, renting, etc.), as well as your reasons for being in favor of a certain option.
You may want to consider organizing a buyout, as this could greatly facilitate the selling process. To do this, you can either offer to sell your share of the inherited property or buy your siblings’ shares so that you are the sole owner.
Let’s go back to our earlier example – if your brother and sister would rather have immediate cash than real estate, but you want to fix the property up and sell it later. Because the property is valued at $300,000 and split evenly three ways, you would pay for the two parts that you don’t already own, amounting to $100,000 to each of your siblings. Upon doing this, you would be the sole owner of the property. You would then be free to sell the property at your leisure.
If a buyout will not work for your situation, be sure to discuss other options such as promissory notes, selling and splitting the profits, or renting the home and splitting the profits.
Step 4: Partition Action
What if one or both of your siblings refuses to cooperate? In these cases, after you’ve exhausted all other options, you may need to resort to filing a partition action.
A partition lawsuit is essentially a legal order that forces the sale of an inherited property, even if the owners haven’t all agreed to sell. Once a partition lawsuit has been filed, it cannot be stopped, so it’s important to be sure that you’ve exhausted all other options.
After considering the matter, the court will decide on one of three outcomes:
One owner needs to buy out the others.
The property must be physically divided (this cannot happen with buildings but may be feasible with rural land or acreage).
The property should be sold, and the profits split up among the owners.
Using our earlier example, let’s say that you and your brother have both agreed to sell the property, but your sister wants to keep it as a vacation home. Unfortunately, she is not able to afford a buyout and not willing to consider any other option. You and your brother decide to file a partition action to receive your fair share of the inheritance.
The Risks of a Partition Action
Partition action gets the job done, but it’s not without its risks. Here are the risks to be aware of before you file a partition action to force the sale of your inherited property.
You cannot stop a partition action. Once a partition action has been filed, there is no way to stop it from going before a court. Even if your siblings change their minds later on and decide they want to sell, it might be too late. Of course, it is possible to appeal a court’s decision, but this will take time and money.
The person filing has to front the bill. Any legal fees and costs fall on the shoulders of the person who has filed the partition action, which means that expenses could end up eating into your potential profits.
The court may reach a decision you don’t agree with. You may file a partition action in hopes of reaching a buyout agreement, but if this is not possible, the court will still resolve the case – albeit in a way you might not like, such as putting the inherited property up for auction.
Going to court can be costly. Deciding things in court is not only a lengthy process, but it is also an expensive one – thanks to attorney fees.
It can have familial repercussions. Taking family members to court can be an emotional time and may result in anger, guilt, and other negative emotions and feelings.
When to Force a Sale
Considering the risks involved, it can be difficult to know when you’ve reached the appropriate time to file a partition action to force the sale of inherited property. Generally, forcing a sale should be saved until you’ve exhausted all other options.
You will know that it’s time to force a sale when you have attempted to discuss all your options with your siblings and still haven’t agreed on a solution and aren’t able to keep the property, either for financial or personal reasons. Remember, you are not obligated to keep a property that you don’t want or can’t afford.
The Right Buyer Makes Selling Inherited Property Easier
If you are inheriting a property with your siblings, it’s important to know what options are available to you so that you can make the best choices. If you’re interested in selling your inherited property, clear and open communication with the other owners is not just recommended – it’s a necessity.
Finding the right buyer for your inherited property often requires countless hours of research or a costly agent with all kinds of fees and commissions, but with our team at House Buyers LI, selling has never been easier.
We offer fair, fast, and timely cash purchases for homes throughout Long Island. When you work with us, there are no mortgage approvals, hidden fees, or closing costs. After we take a tour through the home, we can give you an instant offer and close in just a few days so that you can have your cash when you need it. We know that the prospect of a fast, easy sale can make it much easier to reach an agreement about your shared property.
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