The Nest

NestApple's Real Estate Blog

Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.

What Tax Benefits for Investment Properties in NYC?

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Purchasing an investment property is an efficient way of receiving some passive income in general. However, investing in NYC remains attractive, given the high rental income real-estate-investment-tax_1that it entails. However, investors and owners struggle with the costs of buying, owning, and operating real estate in NYC. Therefore, there are many tax programs to keep the market robust. What Tax Benefits for Investment Properties in NYC? There are plenty of options. However, most investors do not know they exist.

Tax benefits for investment properties

  • Tax Benefits for Investment Properties and tax exemption programs exist to incentivize investment and real estate growth.
  • Most tax programs for rental investments are tax abatements.
  • Those tax abatement programs include Green Roof Abatement, PILOT, NYCIDA’s, 421 plans, and J-51.
  • Other tax exemptions include 1031 Exchange, REAP, and AIRS.
  • 1031 Exchanges involve many commercial or residential investment properties within a strict time frame.
  • Lastly, the most straightforward tax deduction remains property depreciation.

PILOT agreements (Payment in Lieu of Taxes)

With this option known as a PILOT program (or Payment-In-Lieu-Of-Taxes), commercial property owners can make federal payments to their city and state. The PILOT program PILOT program - Payment in Lieu of Taxesprovides an incentive to property owners looking to renovate or build from scratch. A PILOT designates a payment to the authorities to pay back the lost property tax money. These developers can benefit from tax advantages through certain agreements. Therefore, these properties are exempt from property taxes as long as they make a “payment in place of taxes.” The PILOT program won’t decrease NYC property taxes. The amounts will be the same rate as when the authorities first assessed the property. Also, only real estate taxes will apply, and personal property taxes and sales taxes will not change. The NYC IDA (Industrial Development Agency) and the NYC EDC (Economic Development Corporation) are the agencies that issue these permits.

NYCIDA / NYCEDC

Supporting business growth and relocation, the New York City Industrial Development Agency also provides tax abatements. NYCIDA offers incentives including NYCIDA : NYCEDCtax benefits for investment properties such as a reduction on property tax for up to 25 years, and waived city and state sales taxes. If you apply for financial assistance with NYCIDA, you need to meet these criteria to qualify:

  • Location of the future property
  • Jobs created and average wage
  • Type of business
  • Size of the capital investment (on top of the acquisition value)
  • The financial reputation of the owner

421a tax abatement

A 421a tax abatement helps a developer lower property taxes for 10 to 25 years. The developer applies credit towards the total amount of taxes owed. Created in 1971, regulators nyc-tax-abatement-421a - Tax Benefits for Investment Propertiesdesigned the 421a tax abatement program to encourage NYC developers to build new residential buildings on unused land. In 2017, the 421a tax abatement program was renamed Affordable New York. The program also focuses on affordable housing. Indeed, the guidelines include affordability areas in the five boroughs.

Properties with over 300 residential units became eligible for a 100% tax abatement for up to 3 years during construction phane then 35 years after construction. You may also qualify for this tax reduction if you have recently made renovations on a multi-family residential building. However, the advantages can differ depending on location, business characteristics, and eligibility for affordable housing. Interestingly, if the construction project continues to qualify, the tax break will go with the property if sold.

To start the application process, one must apply to the NYC Department of Housing Preservation and Development (HPD).

ICAP

The ICAP (Industrial and Commercial Abatement Program) provides abatements for property taxes for up to 25 years. Eligible properties include commercial and industriaICAP process - Tax Benefits for Investment Propertiesl buildings (built or renovated). ICIP, previously known as the Industrial Commercial Exemption Program, turned into ICAP when ICIP’s program was over in 2008.

Requirements

  1. Location: Permitted almost anywhere in NYC, except areas south of 96th Street, north of Murray Street, Frankfort, and Dover Street. Commercial renovations in NYC are allowed in most neighborhoods except the streets between 59th and 96th.
  2. Improvements: Construction cannot take longer than five years to finish. The developer must spend 30% of the property’s Taxable Assessed Value within four years from the beginning of the construction date. Lastly, projects that spend at least 40% of their Taxable Assessed Value receive additional abatements.
  3. Restrictions: Benefits are available for “Peaking Units,” or spaces that generate electricity.

AIRS program

The AIRS (Affordable Independent Residences for Seniors) Program replaces the “non-profit residence for the elderly.” This program allows both not-for-profit and for-profit businesses to develop affordable housing for seniors. The AIRS program provides extra space if a developer decides to create affordable housing for seniors.

J-51 exemption and abatement

A J-51 abatement is a tax exemption that puts a hold on the assessed value of the property before construction starts. Therefore it decreases your property tax on a dollar forJ-51 dollar basis. The J-51 tax abatement program was initially established in 1955 to encourage landlords to install hot water plumbing in their buildings. Today, authorities expanded the program to include most major capital improvement items such as window replacements, elevator overhauls, and facade work. To qualify, you must renovate the property. Alternatively, you can turn a commercial or industrial building into a residential one.

Affordable housing projects can receive benefits lasting for 34 years. Thirty of those years benefit from full tax benefits for investment properties. The remaining four years is the phasing out period. All other projects receive the 14-year exemption program, with 10 of those years being full benefits and a 4-year phase-out period.

Green roof abatement

This tax advantage offers a one-time only credit for properties with green roofs. The tax reduction equals to $4.50 per square feet of green roof space. The benefits are limited toGreen Roof Abatement the least of $100,000 or the cost of property taxes due for the property. If using a solar energy system, you can get additional sales tax exemptions.

  1. Requirements: The property must be in a 1, 2, or 4 classification. Also, the property must have at least half of the roof covered by a green roof.
  2. Exclusions: If you receive the following, you cannot benefit from this tax benefit: ICAP,  421-a/b/c, PILOT.

REAP

The “Relocation and Employment Assistance Program” provides business taxes for employments relocating from outside of NYC or below 96th Street in Manhattan to properties Relocation and Employment Assistance Programlocated above 96th Street.
  • Eligible Businesses: the business has to reposition at least one employee from outside the REAP area to an approved location. The company has to prove that it has dealt with operations outside NYC or lower than 96th Street in Manhattan for at least two years before relocating.
  • Benefits: With REAP, companies receive a credit of $3,000 per year for 12 years for each employee to relocate to a specified qualified location as zoned by the city. Alternatively, companies receive a yearly credit of $1,000 per share when relocation to parts of the available area that are not revitalization areas.

1031 Exchange: the #1 used tax benefits for investment properties in America

The 1031 Exchange is a tax deferment scheme to defer1031_Benefits_Info - Tax Benefits for Investment Properties taxes during the transfer of a property. Defined by Section 1031 within the Internal Revenue Code, the regulator created the 1031 Exchange with the design that the investor may still have their cash involved in the investment and may not have enough money to pay taxes.

This law gives an investor the right to defer paying capital gains taxes on a sold investment property as long as he purchases another equally like property with the money of the first property.  Therefore, the investor avoids capital gains. The taxpayer hires a trusted intermediary to watch over the funds until completing the transaction. The property must be an investment.

Qualifications for 1031 tax deferral

  • The property must be exchanged, not sold.
  • Both properties exchanged and received are for rental, investment, or used in a trade or business.
  • The received property remains of similar likeness to the property transferred.
  • The investor must identify the new property within 45 days and received it by 180 days or after the transfer of the sold property.

What happens if you have multiple properties to exchange?

An investor can buy more than one property for replacement, but to do so, they must fit into one of these rules: 3-property, 200% rule, or the 95% rule.

The investor can identify no more than three potential properties. Under the 200% rule, their total value does not go over 200% of the property released. If the full fair market value equal to 95% or more of the replacement properties, then the investor can specify any numerical amount of replacement properties.

The four types of 1031 exchanges

Investors can choose between four types of like-kind exchanges they can decide between simultaneous, delayed, construction/improvement, or reverse.tax-benefits - Tax Benefits for Investment Properties

  1. A simultaneous exchange designates when the closings of the” new” property and the old property close on the same day.
  2. A delayed exchange is the most popular among investors—the benefit results in a prolonged amount of time. An investor has up to 45 days to identify the new property and 180 days to close.
  3. Reverse Exchange or forward exchange happens once the investor has brought the replacement property via an exchange accommodation titleholder before exchanging the property owned.
  4. Construction or Improvement Exchange: This type of exchange gives investors the right to make renovations on their replacement property before closing.

The simplest way to get tax benefits for investment properties

Knowing the various programs, you can save money on your investment can help depreciation of real estate investment property - Tax Benefits for Investment Propertiesyou make even more money. Therefore, you can get creative with how to save on taxes, whether that means making your PILOT, tax abatements programs like 421a or J-51, or a property exchange (1031). However, the most efficient way to save on taxes is by doing nothing! The IRS takes depreciation into account when calculating taxes on your investment. This means a good chunk gets exempt when it comes to paying residential or commercial property taxes.

How much can you depreciate from your residential pr rental property?

You must take the purchase value and subtract the value of the land (since you cannot depreciate land.) Then, you can divide that net amount by 27.5 years. For example, if the total depreciative value is $1 million, and you divide that by 27.5 years. Therefore, the annual exemption is $36,363.64. For example, if you receive $4,500 monthly (or $54,000 annually from rent), you can deduct $36,363.64, making your taxable income $17,636.36. That is not factoring other deductions like property taxes, insurance, and HOA. In conclusion, your taxable income comes out to be very small or negative.

How much can you depreciate from your commercial property?

For commercial properties, an investor can depreciate a property further at 39 years. Therefore, you subtract the value of the actual land from the purchase price, to obtain the building’s depreciative worth. For example, an $8 million building’s annual deduction comes down to $205,128.

Should you apply for tax programs for your investment property?

Buying an investment property in New York is expensive. Renovation, improvements add up. Therefore, tax tax calculations for depreciation - Tax Benefits for Investment Propertiesincentives and abatements programs are efficient both on the federal and local levels. They make owning and maintaining an investment more feasible and profitable. The most straightforward tax deductions come from depreciation, you can realize more tax benefits for investment properties by utilizing one or more of the programs mentioned in this article.  It could be as simple as putting in solar panels and taking advantage of the green roof abatement, or applying for J-51 while making improvements to your property. Still, there are additional ways to save. For maximum savings and profits, investment and commercial property owners should investigate all their options.



Written By: Georges Benoliel

Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.

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