Non-Resident Withholding
If you are a non-resident of New York selling property in the state, you may be subject to estimated tax withholding at closing under Tax Law §663. The buyer's attorney or title company withholds a portion of the sale proceeds and remits it to the state as a prepayment of your capital gains tax. The withholding amount is typically the estimated gain multiplied by the highest New York tax rate.
You can file Form IT-2663 before closing to reduce or eliminate the withholding if your actual tax liability will be lower than the standard withholding amount. Work with your tax professional to prepare this form in advance of closing.
Capital Gains for Investment Property
If the property was never your primary residence, you cannot use the Section 121 capital gains exclusion ($250,000 / $500,000). Your entire gain is taxable — both federal and New York State. If you rented the property, you also face depreciation recapture at up to 25 percent.
Consider a 1031 exchange if you plan to reinvest in another investment property. This defers all capital gains and depreciation recapture taxes. The exchange must be set up before closing with a qualified intermediary. See our 1031 exchange guide for details.
Filing Requirements
Non-residents who sell New York property must file a New York State non-resident income tax return (Form IT-203) for the year of the sale. Your home state may provide a credit for taxes paid to New York, but you should verify this with a tax professional in your state.
If you are an absentee owner who formerly lived in the property, you may still qualify for a partial Section 121 exclusion depending on how recently and how long you lived there. The rules are complex — consult a tax professional before closing.