What are Tax Benefits for Investment Properties in NYC?
Buying an investment property is a great way of receiving passive income, in general, but investing in a market like New York City may be especially attractive with the high rental income that it fetches.
However, many investors and property owners struggle with the costs of buying, owning, and maintaining real estate in New York City, which is, let's face it, not cheap to say the least.
That's why there are so many tax programs to help encourage keeping the market robust.
While there are plenty of options out there, many do not know they exist or where to even begin. These are some popular programs investors can take advantage of.
Tax Benefits for Investment Properties
- Tax benefit and exemption programs exist to spur investment and real estate growth in the New York City market.
- The majority of the tax programs offered for investment properties are some kind of tax abatement model.
- The tax abatement programs include but are not limited to PILOT, NYCIDA's tax incentive programs, 421 programs, J-51, and Green Roof Abatement.
- Other programs like 1031 Exchange, REAP, and AIRS, which consist of tax exemption, credits, and square footage bonus.
- 1031 Exchanges involve many different types of commercial or investment properties and types of exchanges within a strict time frame.
- The most basic form of tax deduction comes from property depreciation.
Payment in Lieu of Taxes (PILOT) Agreements
One option for commercial property owners is federal payments made to their local government, known as a PILOT, or Payment-In-Lieu-Of-Taxes.
The PILOT program encourages commercial real estate investments by providing an incentive.
This program is best for property owners looking to put in a substantial amount of funding for a large renovation on a property or for an owner looking to build from scratch.
A PILOT is a payment to the government to reimburse some or all of the lost property tax money. Usually, this lost money is due to tax-exempt ownership or use of real property.
These businesses may gain property tax advantages through government agency agreements.
Through these agreements, properties are exempt from having to pay property taxes as long as they make a payment in lieu of taxes.
It is important to know that the PILOT program will not reduce NYC property taxes made to the city.
The payments will be the same rate as when the property was first assessed when it was initially approved for PILOT.
Also, under the PILOT program, personal property taxes and sales taxes will not be affected; only real estate taxes will apply.
When looking into the PILOT program, here are some common guidelines that you will most likely see:
- Your payment will be equivalent to taxes that would be due if the property wasn’t exempt
- Payment is the original tax paid on the property before acquisition
- Payment for the initial pre-acquisition tax price phases out over time
- If a certain percentage of total acres or value of the property is state-owned, then payment is required
- Cost is a flat rate per acre but differs by land use; however payment can be made in a lump sum via negotiation
If looking to apply for a PILOT agreement, the NYC Industrial Development Agency (IDA) and the NYC Economic Development Corporation (EDC) are the two agencies that can issue these agreements.
Supporting business growth, expansion, and relocation throughout all five boroughs, the New York City Industrial Development Agency also helps to lower the cost of a capital investment.
NYCIDA offers a tax incentive program that includes benefits such as: abatement on property tax for up to 25 years, a reduced mortgage recording tax, and waived NYC and state sales taxes on all purchases of materials/equipment dealing with construction.
Once you apply for financial assistance with NYCIDA, there are a few pieces of information that will help determine if you are qualified to receive these benefits, including but not limited to:
- Location/geography of the future property
- Amount of jobs being created as well as the average cost of wages
- Type of business that the property will be used for
- Size of the capital investment - not including acquisition value (there is a $5 million minimum for commercial office space)
- Financial reputation of the owner of the property or business.
Steps to the Application Process:
- Meet with the employees of NYCIDA to asses your eligibility
- Submit the core application
- NYCIDA Public hearing notice publication
- A public hearing package is posted
- NYCIDA public hearing is conducted
- Board of Directors from NYCIDA review and vote
- Additional approvals take place
421a Tax Abatement
A 421a tax abatement helps to lower your property taxes for about 10-25 years by applying credit towards the total amount of taxes owed.
Created in 1971, the421a tax abatement program was originally created as a way to support and encourage property developers to build new residential buildings on unused or underused land in NYC.
In 2017, the tax abatement program was renewed in 2017 and was renamed Affordable New York.
While the 421a tax abatement program continues to encourage NYC developers, today the program also focuses on affordable housing.
The guidelines for a 421-a tax exemption include enhanced affordability areas in sections of Manhattan, Queens, and Brooklyn.
Properties with over 300 residential units situated in these areas are eligible for a 100% tax exemption for up to 3 years during construction plus 35 years after construction is complete.
During the period of exemption, the developer is required to pay at least the property taxes on the property before the exemption was granted.
If you have recently made renovations on a multi-family residential building, you may qualify for a property tax exemption.
However, the benefits may differ depending on location, property use, and requirements for affordable housing. If the construction project continues to qualify, the tax break will go with the property if sold.
In order to start the application process, an application must be submitted through the NYC Department of Housing Preservation and Development (HPD).
Once a Certificate of Eligibility has been received, you will need to submit this along with Finance’s 421a application.
Properties that are eligible include:
- Rental projects containing one or more multiple units
- Homeownership projects for units operating as a condominium or cooperative housing
- Those containing six or more dwelling units
- Properties that were newly constructed
- Undergoing excavation/construction of base footings and foundations starting between 1/1/2016 and 12/22/22.
- The first TCO or PCO is issued covering “all residential areas” before 6/15/2026.
Types of 421a Abatement Programs
The Industrial and Commercial Abatement Program offers abatements for up to 25 years for property taxes. Eligible properties for this program include commercial and industrial buildings that are being built, renovated, or any other type of physical improvement.
ICIP, formerly known as the Industrial Commercial Exemption Program, was replaced by ICAP when ICIP’s program was over in 2008. ICAP’s program has now been extended until March 1, 2022.
There are a few things that ICAP looks for before granting abatements. Some of these include:
New commercial construction is permitted almost anywhere in New York City, except for a few parts of Manhattan. These exceptions include the areas south of 96th Street, north of Murray Street, Frankfort, and Dover Street.
Commercial renovations in NYC can be done in most neighborhoods except the streets between 59th and 96th.
For commercial modifications being done below 59th Street, the Garment Center District, and lower Manhattan (Murray Street, Battery Place, South Street, and West Street), additional commercial benefits may be available.
- Construction cannot take longer than five years to finish starting from the date that the fist building permit was issued, or from the start of construction if no permit is required.
- 30% of the property’s Taxable Assessed Value must be spent within four years from the date that the building permit was given/start of construction date.
- Construction projects that spend 40% of their Taxable Assessed Value reap additional benefits.
Restrictions on Eligibility
- Benefits are available for “Peaking Units”, or spaces that generate electricity.
- Preliminary applications are accepted until March 1, 2022. The final application must be filed within one year from when the building permit was first issued. Applications filed after these dates will be denied.
The Affordable Independent Residences for Seniors (AIRS) Program replaces what used to be called “non-profit residence for the elderly”.
The AIRs program differs from its previous name in that it allows both not-for-profit and for-profit businesses to develop housing for seniors that is affordable.
The AIRS program provides extra square footage if a developer decides to create permanently affordable housing for seniors with incomes equal to or less than 80% of the Area Median Income (AMI).
- At least 10 AIRS units per project
- Units are priced at least 80% AMI
- Each unit must be occupied by at least one person of the age 62 or older
- At least 4% of the space in the AIRs building must be shared/common areas such as dining rooms and recreational rooms.
- AIRS units and all common spaces need to be in compliance with UFAS accessibility requirements
J-51 Exemption and Abatement
A J-51 abatement is a type of tax exemption that puts a hold on the assessed value of the property before construction was started but decreases your property tax on a dollar for dollar basis.
The J-51 tax abatement program was originally established in 1955 to encourage landlords to install hot water plumbing in their buildings.
Today, the program has been expanded to include most major capital improvement items such as window replacements, elevator overhauls, and facade work.
In order to qualify for the J-51, you must have renovated the property or are planning to turn a commercial or industrial building into a residential one.
Affordable housing projects usually receive benefits lasting for 34 years, with 30 of those years providing full tax benefits and the remaining 4 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 phasing out period.
Projects being privately financed in Manhattan south of 110th Street (including both co-ops and condominiums) usually receive some benefits, though they are limited.
Green Roof Abatement
The Green Roof Abatement offers a one time only tax abatement for properties containing green roofs. The tax abatement is equal to approximately $4.50 per square feet of green roof space.
The benefits are limited to whichever is less: $100,000 or the cost of property taxes due for the property that tax year.
If you are using a commercial solar energy system to supply your greenhouse, you may be entitled to additional sales tax exemptions.
To qualify, the property must be in a 1, 2, or 4 classification and must have at least 50% of the roof covered by a green roof. Construction must have started on or after August 5th, 2008 to be considered.
If you receive the following, you are excluded from the Green Roof Abatement:
- 421-a, 421-b, 421-g
- Make payments to PILOT
The Relocation and Employment Assistance Program has been extended until June 30th, 2020.
This program provides business income taxes for jobs relocating from outside of NYC or below 96th Street in Manhattan to properties located above 96th Street in Manhattan.
In order to be eligible to apply, the business has to reposition at least one co-worker from outside the REAP area to an approved located.
You will also need to prove that you have dealt with substantial business operations outside NYC or lower than 96th Street in Manhattan for at least 24 months before relocating.
Most retail and hotel businesses do not qualify, however, some internet, mail, and/or telephone sales may.
With REAP, a credit of $3,000 per year is given for up to 12 years for each eligible employee or aggregate employment share for relocating to a certain qualified location as zoned by the city.
Alternatively, a yearly credit of $1,000 per share can be provided when relocation to parts of the eligible area that are not revitalization areas.
Credits are refundable during the first year of relocation and the following four years. Any unused credits can be carried throughout the next five years.
Credit may be taken against:
Also known as a Starker Exchange or Like-Kind Exchange, the 1031 Exchange is a tax deferment plan most commonly used by real estate investors.
It allows the taxpayer to defer taxes during the transfer of a property.
Controlled by Section 1031 within the Internal Revenue Code, the 1031 Exchange was created with the intention that the investing taxpayer may still have their monies involved in the investment and may not have enough liquid assets to pay taxes.
This plan gives an investor the right to defer paying capital gains taxes on a sold investment property, as long as another equally like property is bought with the proceeds of the first property.
By doing this, you avoid capital gains for a limited amount of time.
However, the taxpayer involved with the transaction cannot have access to or control over any of the monies while the exchange takes place.
To solve this problem, the taxpayer can hire a trusted intermediary to watch over the funds until the transaction has been completed.
Before getting involved in a 1031 Exchange, Real Estate Advisor Vladimir Baron has a few words of advice:
“One of the most important things to know before getting involved is making sure and understanding the qualifications. Currently, primary residences and second homes do not qualify. The property must be an investment.”
For those looking to get involved with this type of exchange, Baron advises, “Speak with people who have done a 1031 Exchange, read the latest blogs, and network. Make sure you know your markets.”
For those in the middle of executing a 1031 Exchange, the IRS recently announced on April 9th that those who have a 45 or 180 day exchange period deadline between April 1st-July 15, 2020 will automatically have an extension until July 15th.
Qualifications for 1031 Tax Deferral
- The property must be exchanged, not sold.
- Both properties being exchanged and received must be held for rental, investment, or used in a trade or business.
- The received property must be of similar likeness to the property that was transferred.
- While the exchange does not have to happen at the same time, the replacement property must be picked out within 45 days and received by 180 days or after the transfer of the relinquished property.
What If You Have Multiple Properties to Exchange?
A taxpayer is permitted to claim more than one property for replacement, but to do so they must fit into one of the following rules: 3-property, 200% rule, or the 95% rule.
Under the 3-property rule, the taxpayer can identify no more than 3 replacement properties.
A taxpayer can claim more than 3 replacement properties under the 200% rule, if their aggregate value does not go over 200% of the property being released.
If the taxpayer acquires buildings/property before the exchange period is over and has a total fair market value equal to 95% or more of the identified replacement properties, then the taxpayer is allowed to specify any numerical amount of replacement properties under the 95% rule.
The Four Types of 1031 Exchanges
When it comes to investors, there are four types of like-kind exchanges they can decide between: simultaneous, delayed, construction/improvement, or reverse.
A simultaneous exchange happens when the closings of the”new” replacement property and the property being given up close on the same day.
If the exchange cannot happen at the same time, it may lead to disqualification of the exchange and will enforce the payment of the full amount of taxes.
Delayed exchange is the most popular type of exchange used by investors and takes place once the owner gives up the original property before the replacement property is within their possession.
The benefit of this exchange results in various tax benefits as well as a prolonged amount of time.
The investor then has up to 45 days to confirm the replacement property and 180 days to finalize the property sale.
Also known as a forward exchange, a reverse exchange happens once a replacement property has been bought via an exchange accommodation titleholder prior to exchanging the property that is currently being owned.
When you buy first and exchange later, it becomes tricky in the sense that all cash is required for the transaction. To make matters worse, most banks will not provide loans for reverse exchanges.
Some differences that the reverse exchange may have compared to the delayed exchange include:
Construction or Improvement Exchange
This type of like-kind exchange gives taxpayers the right to make renovations and/or improvements on their replacement property before closing on it.
This is a good option for those who have found the perfect place but would like to have extra work done, such as building an addition onto the property.
A construction exchange provides the taxpayer with the property of their choice while being able to save on taxes and reap the benefits of a like-kind exchange.
By using tax-deferred money, the taxpayer can modify the replacement property as long as it is within the 180 day period.
There are some requirements that the taxpayer is expected to meet when involved in a NYC construction exchange.
When it comes to investing commercially, especially during these uncertain times, it may feel like the walls are closing in and that options are bare.
However, with a bit of research and compromise, landlords and investors alike can still profit and run their businesses successfully, as long as they are well informed of their decisions.
The Simplest Way to Reap Tax Benefits on Investment Properties
Even if you didn't purchase an investment property for tax benefits, and solely to collect passive income, knowing the many ways you can save money on your investment can help you make even more.
As we reviewed, you can get creative with how to save on taxes whether that means making your own payments in place of taxes (PILOT), tax abatement programs like 421a or J-51, or a property exchange (1031).
However, the simplest way to enjoy saving on taxes is simply by doing nothing!
The federal government takes depreciation into account when calculating the taxes on your investment or commercial property, which means a good chunk of change gets exempt when it come to paying taxes on the property.
Tax depreciation works differently for rental properties and commercial.
How Much Can You Depreciate from Your Rental Property?
For rental properties, you need to take the purchased value of your unit(s) or building and subtract the value of the land since land can never be used up or depreciate the way a structure can.
Once you have the net amount, you can divide that by 27.5 years, which is the full allowable number of years you can depreciate your rental property.
For example, if the full depreciative value of your rental property is $1 million and you divide that by 27.5 years, your annual exemption would be $36,363.64.
If you're receiving $4,500 monthly or $54,000 annually from rent, you can deduct $36,363.64 from that making your taxable income $17,636.36.
And that's not even factoring other deductions like property taxes, insurance, and operating expenses, meaning your taxable income may come out to be very small.
How Much Can You Depreciate from Your Commercial Property?
Commercial properties are qualified differently from rental properties because of the way they are constructed as well as the use of the structure.
The full allowable depreciation for commercial properties goes further at 39 years.
Once again, you must subtract the value of the actual land from the full value, in order to end up with the building's depreciative worth.
An $8 million building's annual deduction becomes $205,128, which is no small amount.
Should You Apply For Tax Programs for Your Investment Property?
Not only does purchasing an investment property in New York take a significant amount of money but also its renovation, improvements, and upkeep.
For this reason, tax incentives and exemption programs exist both on the federal and local levels, making owning and maintaining your investment more feasible.
The easiest tax deductions come from depreciation, but more benefits can be realized 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, but there are simple additional ways to save.
For maximum savings and profits, investment and commercial property owners should investigate all their options.