New York State Tax

Real Estate Sales and Tax

Many states assess a transfer tax when property changes hands or is financed. The fees are paid when the documents are recorded at the courthouse in the county where the property is located. The seller typically pays the tax on the deed, and the buyer pays the tax on the note and mortgage or deed of trust. However, the responsibility for payment is negotiable. A seller frequently makes concessions and pays the tax on the financial documents.

For Federal taxes, there are two basic types of real estate property -- primary residences and investment -- and the rules are different for both. The owners of a primary residence may qualify for a capital gains tax reduction or exclusion. Individuals who own a home for two years and file income tax returns singly, qualify for a capitals gains exemption on the first $250,000 of realized profit. Married couples filing jointly can claim a $500,000 capital gains exemption. That means the realized profit is tax-free money; you don't have to declare as income on the tax return. You can do this every two years. However, you derive no benefit if you suffer a loss on the sale of a primary residence.

This is not the case with investment properties; a loss on one property offsets the gain on another, and losses can carry over to the next year. That's why an investor sometimes buys properties that he expects will lose money. However, if the investment property sells for a profit, the savvy investor can defer paying capital gains tax indefinitely.

The Internal Revenue Code Section 1031 Like-Kind Exchange provision allows an investor to reinvest the proceeds of an investment property in one or more like-kind properties and defer the capital gains tax. The tax code only allows exchanges for investment properties and not for primary residences or vacation homes. For example, an investor can exchange a duplex for one or more multifamily properties, vacant land lots, warehouses, office buildings or other investment property.

The 1031 exchange rules are strict and you must follow them precisely, or you will lose the deferment. There are different variations of an exchange, but a few rules apply to all the various forms. One requirement is that the seller never handles the proceeds of the sale; he must use an intermediary who deposits the money in their own trust account. Another criteria is that all the proceeds of the sale must be used to purchase like-kind property; the seller can't hold back any of the funds. This means that the value of the replacement property is at least equal to the relinquished property. In one of the common types of exchanges, an investor has 45 days after the sale of a property to identify one or more replacement properties, and he has 180 days to close on one or more of the previously identified properties. Be sure to check for any changes in the IRS code before you enter into an exchange.

Use these resources if you need help filing your personal income tax return or have other questions regarding real estate tax.