5 Tax benefits for investment properties in NYC

Property investment is the act or process of putting your money into a commercial or residential property with the idea of later converting it again into liquid assets through the sale. This may be long or short term depending on the investment style of each person individually. Irrespective of that, the option of investment is a lucrative one for many not only for it allows the money one invests to grow but also for it allows tax benefits to the investor.

New York City (NYC), all five boroughs, see their fair share of property investment for one or both of the benefits we have mentioned. To understand why investors do so and how it helps, let us show you the tax benefits that accrue from such an investment in both residential and commercial properties. The benefits differ in some aspects due to the nature of the property as you will see. The five (three and two) tax benefits for investment properties in NYC are:

Commercial property

Before we deep dive into the tax benefits that come from investing in commercial properties in NYC, we need to know clearly what a commercial property is. If we look at precedents set on the issue by legal bodies in NYC, commercial property is any property that is used for a profit-making space and is non-residential in nature. This can range from offices, shops, to co-working spaces or even small business unit offices for individuals. If the two conditions of not being residential and of being used to make a profit for a person or entity are met, then the property is identified as a commercial property.

There are three major tax benefits that come from investing in commercial property in NYC. These are:

Benefit under the PILOT program

The Payment in lieu of Taxes (PILOT) program is one that has been set up not only in NYC but in many parts of the USA. Here are the aspects of the program that help save on taxes:

  • Investors have an option to pay an amount to the relevant government in lieu of property based taxes
  •  Such a payment is a direct commitment of money to the government and helps them immensely rather than property tax
  •   The investor gets rebates and other benefits and reductions in the tax needed to be paid for the commercial proper
  • A lower tax or lack of property tax means more spending income in the hand of the investor
  • In this manner, both parties gain from the program

NYCIDA/ NYCEDC

This is a benefit that the New York City Industrial Development Agency provides to commercial properties and its investors. Let us see a list of the benefits that come to such an investor from this front:

  • Abatement on property tax for 25 years or up to that
  • Reduction in the mortgage recording tax
  • Reduced sales tax on material/ equipment purchase in NYC/ state taxes

To avail of these benefits, an investor must apply to the authority with the right documentation and meeting the prerequisites. This process is no easy one but seeing the benefits is worth trying for as an investor.

No FICA tax

As we will show you at length when we mention residential property, rental property is more of a commercial one than residential Irrespective of its use, when it comes to the investor that is. With that in mind, the Federal Insurance Contributions Act may come into the picture if property investment is the primary source of income of the person. A rental property does not count as self-employment though and the person can save highly on tax and money by not paying under FICA here. In this sense, a rental property comes to the benefit of the investor.

Residential property

Looking in comparison to a commercial property, a residential one is fairly simple to define. Residential property is anywhere a person or family reside and no business or commercial activity is carried out.

The definition is simple but when it comes to laws on the property in NYC, there is a catch. From the viewpoint of an investor, if a property is purchased for the sole purpose of renting/ leasing to others in order to make a profit from the same, even though the use of the property by those staying in it would be residential, the investor will be treated as owning a commercial property. The taxation scheme for the investor would be accordingly.

With that in mind, the residential property investor is someone who does look to make good from their investment but does not use the purchased property commercially but purely residentially.

Here are the two main tax benefits that an investor can avail of:

 Lower tax rate – This will only be a benefit to you if you keep the property with you for longer than a year. In the assumption that you do, understand that sale of the property results in a capital gain for you as per legal parlance. This capital gain is taxable in NYC. The rate of the tax will however be much lower for you if we continue on our assumption. The tax accruing to you or sales is a must so the saving comes in the form of saving tax rate on capital gains overall.

Saving on depreciation – Depreciation is a concept where the total rate of the property is divided by the expectant life of the property and a yearly amount is found and reduced from the property. In the case of investment in property, the sale of the same can result in tax not only on capital gains as we mentioned but also on depreciation. A no-profit sale can result in saving not only on that tax but also the depreciation value in itself that you would have had to pay in terms of loss of profit. This may seem counterproductive but a thorough study of the concept of depreciation shows how this is tax and money-saving.

5 Tax benefits for investment properties in NYC 3
Jennifer Villalba
Jennifer is an editor and author at nyrentownsell a leading real estate company in New York.

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