What Surprised an Albany Landlord About Selling a Rental Property in Albany, NY at Year-End?
The situations described here are composites drawn from the types of jobs and decisions we encounter regularly. Names and specific figures are illustrative.
The decision was made over a weekend. The landlord had owned a duplex in Albany’s Pine Hills for eleven years, rented both sides and, after a roof replacement, a second boiler repair and a tenant who left in September, concluded he was done. The market was strong. He wanted it closed by December. What he had not thought through yet was that selling a rental property in Albany, NY is not the same transaction as selling a home you live in, and that the differences begin well before a sign goes in the yard.
The number that came back from his accountant
Before calling anyone about listing, he sent his numbers to his accountant, and the answer was not what he expected. The IRS allows the owner of a residential rental to deduct depreciation over 27.5 years, and the land is not depreciable. Every year he had taken that deduction, which lowered his taxable rental income. When he sold, the IRS would look back at those deductions.
The part of the gain that is attributable to depreciation is called unrecaptured section 1250 gain, and it is taxed at a maximum rate of 25 percent. The rest of the gain is taxed at the long-term capital gains rates of 0, 15 or 20 percent depending on income. In this illustration, eleven years of depreciation added up to a large enough amount that the recapture alone was a number he had not planned for. The accountant’s advice was to treat the sale price as a starting point and not as the take-home figure.
What a 1031 exchange would require
The accountant raised the possibility of a Section 1031 exchange, which lets an owner defer capital gains tax and depreciation recapture by rolling the proceeds into another investment property. The idea sounds simple. The rules are not flexible. Under IRS rules, replacement property must be identified in writing within 45 days of transferring the property being sold, and the exchange must be completed by the earlier of 180 days or the due date, with extensions, of the tax return for that year. The 45-day deadline does not move for weekends or holidays. A qualified intermediary has to hold the proceeds, because if the seller touches the money the exchange can fail.
For a landlord who only wanted to be finished with being a landlord, that was a trade-off to think about. A 1031 exchange defers the tax. It does not remove it, and it keeps him in the business of owning property. He decided to look at it seriously for one afternoon and then set it aside. A homeowner in that situation would probably say the useful part was learning that the choice existed before he listed, since the intermediary has to be in place before closing.
Tenants and timing
The other side of the duplex was still occupied. The tenant had a lease through the following spring. A sale does not end a lease on its own, and a buyer who wants the property vacant at closing is in a very different position from one who is happy to take over a tenant. In New York, Real Property Law section 226-c requires landlords to give written notice when they do not intend to renew a tenancy or plan a rent increase of five percent or more. The notice period is 30 days for a tenant who has lived there less than a year, 60 days for one to two years, and 90 days for a tenant of more than two years or with a lease of two years or more.
In this illustration, the tenant had been there four years and was paying below-market rent. That made the unit worth more to an investor buyer than to someone planning to live in it, and it meant the landlord needed to decide early which kind of buyer he was selling to. A page on selling a rental property in Albany goes through how tenant-occupied sales are usually marketed, and how that choice changes the listing.
Transfer tax, and what else comes off the top
New York State charges a real estate transfer tax of $2 for every $500 of consideration, which is 0.4 percent of the sale price, and the seller typically pays it. On a $350,000 sale that is $1,400. It is a small number next to depreciation recapture and commission, but it belongs on the same sheet of paper. So do the attorney, any repairs the buyer’s inspection turns up, prorated rents and security deposits that have to be accounted for at closing. Landlords sometimes miss the deposits, which belong to the tenants and must be transferred or returned in line with the lease and New York law.
The landlord had a list that looked like this by the end of the week: sale price, mortgage payoff, commission, transfer tax, attorney, prorated rent and deposits, federal tax on the gain including recapture, and the New York income tax on the same gain. The sale price was only the first line.
What he decided
In the end he did not do a 1031 exchange. He decided to list the duplex in early November with the long-term tenant in place and market it to investors, because the tenant’s below-market rent was a known quantity and a buyer could underwrite it. Closing slipped into January, which moved the tax bill into the next year and gave him time to plan around it with his accountant. A fall listing is not a bad idea. Buyers who are looking in October and November are usually serious, and fewer homeowners list during the holidays, so there is less competing inventory. Our story about an October buyer in the Albany market shows the same timing from the buying side.
What the story leaves behind
The useful part of the weekend was the order of the questions. Talk to the accountant before the agent. Decide whether a 1031 exchange is worth considering before listing, not after. Read the lease and the notice rules before deciding what kind of buyer you want. And write down every line between the sale price and the check you will actually receive.
Anyone considering selling a rental property in Albany, NY can treat the first call as research, not a commitment. Nothing about the sale is simple, but all of it is knowable before the sign goes up. This is general information and not tax or legal advice, so confirm the details with a CPA and an attorney.
If you’re looking for a home valuation in Albany, you can reach out here.
Sources
- IRS: Like-Kind Exchanges Under IRC Section 1031
- IRS: Fact Sheet FS-2008-18, Like-Kind Exchanges Under IRC Section 1031 (45-day and 180-day rules)
- IRS: Publication 527, Residential Rental Property
- IRS: Publication 544, Sales and Other Dispositions of Assets
- IRS: Topic No. 409, Capital Gains and Losses
- New York State Senate: Real Property Law Section 226-c
- New York State Department of Taxation and Finance: Real Estate Transfer Tax
