Capital Gains Tax on Sale of Home in New York: What Sellers Actually Owe

The capital gains tax on sale of home in New York is not one tax. It is the federal income tax on the profit, plus New York State income tax on the same profit, plus New York City income tax if you live in the city. For most people selling the house they live in, a federal exclusion wipes out most or all of that profit before any of the three applies.

This guide is for owners selling a one-family house, a two-family house, a condo or a co-op in Queens, Brooklyn, Nassau or Suffolk. It explains how the gain is calculated, which costs reduce it, when the exclusion applies in full or in part, what changes when part of the house was rented, and what New York collects at closing from sellers who no longer live in the state. I have worked with sellers for 15+ years, in English and Polish, and the part people underestimate is almost always the paperwork: the records that prove your cost, and the forms that go with the deed.

Do you pay capital gains tax when you sell a house in New York?

You pay tax only on the gain, and only on the part of the gain that is not excluded. Many sellers of a primary residence owe nothing, because their profit is below the exclusion. Others owe tax on a slice of the gain. A smaller group, such as owners of a rental unit, sellers who moved out years ago or heirs with a low basis, owe on more.

The three layers in plain words

What this tax is not

Capital gains tax is an income tax you settle on your return. It is separate from the transfer taxes a seller pays at closing, which are based on the sale price, not on your profit. A seller can owe transfer taxes on a sale with no taxable gain at all. The closing-day costs, including the New York State transfer tax and the New York City real property transfer tax, are covered in the guide to Queens closing costs for buyers and sellers.

The federal home sale exclusion: $250,000 or $500,000

The exclusion under Section 121 of the Internal Revenue Code is the rule that decides most home sales. According to IRS Publication 523, Selling Your Home, you may exclude up to $250,000 of gain on the sale of your main home, or up to $500,000 if you are married and file a joint return, when you meet three tests.

The ownership test

You must have owned the home for at least 24 months during the five years ending on the date of sale. On a joint return, only one spouse needs to meet the ownership test.

The use test

You must have lived in the home as your main residence for at least 24 months, or 730 days, during the same five years. The months do not have to be continuous, and they do not have to be the same 24 months as the ownership period. For the full $500,000 on a joint return, both spouses must meet the use test.

The look-back test

You generally cannot use the exclusion if you already excluded gain on another home sold during the two years before this sale. Sellers who move often, or who sell one home and then another soon after, should check the dates before listing.

New York’s income tax starts from your federal adjusted gross income, so gain you exclude on the federal return generally does not show up in your New York income either. That is why the exclusion decides the outcome at all three levels for most owner-occupants.

How is capital gains tax on sale of home in New York calculated?

The math is the same at every level. You figure the gain once, subtract the exclusion, and the taxable remainder flows to the federal, state and city returns. Three numbers drive it: the amount realized, the adjusted basis and the exclusion.

Step 1: the amount realized

The amount realized is the sale price minus your selling expenses. Publication 523 lists commissions, advertising, legal fees and loan charges the seller pays, such as points, among the costs of selling. In New York, the seller usually also pays the state transfer tax, and in the city the real property transfer tax; your accountant will treat those closing charges as part of your selling costs.

Step 2: the adjusted basis

The adjusted basis starts with what you paid. You add certain purchase closing costs and the cost of improvements, and you subtract items such as depreciation you claimed for rental or business use and insurance payments for casualty losses. The next section lists what goes into it.

Step 3: the gain and the exclusion

The gain is the amount realized minus the adjusted basis. If you qualify, you subtract the exclusion. Whatever remains is the taxable gain.

A worked example on hypothetical numbers

The table below follows one invented Queens house through the formula. The figures are an illustration of the arithmetic, not market data or a prediction of any price.

Look at what the receipts did. Without the $72,000 of purchase costs and improvements, the single owner’s taxable gain would be $380,000 instead of $308,000. Documented basis is money, and it is the easiest part of this tax to lose by throwing papers away.

If you want a starting figure for the sale price side before talking to your accountant, a comparative market analysis gives you an opinion of value based on recent sales; it is not an appraisal. You can request one through the page on what your Queens home is worth.

What raises your cost basis, and what does not

Basis is where sellers have the most control, because it depends on records you either kept or did not. Publication 523 draws clear lines between costs that count and costs that do not.

Purchase costs that add to basis

• Abstract and title search fees, and owner’s title insurance.
• Legal fees for the contract and the deed.
• Recording and survey fees.
• Transfer taxes you paid as the buyer.

Costs tied to the mortgage do not add to basis. Loan origination fees, points, credit report charges, fire insurance premiums and rent paid before closing stay out. Your purchase closing statement shows which line is which, so find it before you list.

Improvements versus repairs

There is one useful exception. A repair done as part of a larger remodeling project counts with the project. If you repainted the rooms as part of a full renovation, the painting is part of the improvement.

What reduces basis

• Depreciation you claimed, or could have claimed, for a rental unit or a home office.
• Casualty losses you deducted and insurance payments you received for them.
• Energy credits and certain subsidies tied to improvements you added to basis.

Rebuilding the record in New York City

Many owners do not have every receipt from a renovation done fifteen years ago. In the city, part of the trail is public. Work that needed a permit was filed with the Department of Buildings, and those filings show the type of work and the dates. Together with bank statements and contractor letters, they help your accountant support the number.

Federal tax rates on the taxable part of the gain

Once you know the taxable gain, the federal rate depends on how long you owned the home and on your total taxable income for the year.

Long-term versus short-term

According to the IRS topic on capital gains and losses, a gain is long-term if you owned the property for more than one year, counting from the day after you bought it through the day you sold it. Long-term gains get lower rates. A home owned for a year or less produces a short-term gain, taxed at the same rates as wages, and in that case you also could not have met the two-year tests for the exclusion.

Long-term rates

Long-term gains are taxed at 0%, 15% or 20%, depending on taxable income. For tax years beginning in 2025, the IRS lists the 0% rate up to $48,350 of taxable income for single filers and $96,700 for married couples filing jointly, the 15% rate above those levels up to $533,400 for single filers and $600,050 for joint filers, and the 20% rate above that. The thresholds are adjusted each year, so your preparer uses the figures for the year of your sale.

The gain itself is added to your income. A seller with a modest salary can still reach a higher bracket in the year of a large sale, which is why timing the closing date across December and January is a question to raise with your accountant early.

The net investment income tax

The IRS describes the net investment income tax as 3.8% on investment income for people whose modified adjusted gross income is above $200,000 if single, $250,000 if married filing jointly, or $125,000 if married filing separately. It does not apply to gain excluded on the sale of a principal residence. It can apply to the taxable part above the exclusion, and to the gain on a rented unit.

New York State and New York City tax on the gain

New York does not give long-term capital gains a lower rate. The taxable gain is added to your other income and taxed at the regular state rates, which rise with income up to a top rate of 10.9%. There is no separate state “capital gains tax” form for a resident; the gain simply appears on your New York return.

Residents of the five boroughs

If you live in Queens, Brooklyn or anywhere else in New York City, the same taxable gain is also subject to New York City personal income tax, which residents report on their state return. Moving out of the city before you sell changes this layer, because the city tax depends on where you live, not on where the property is. A Queens owner who moved to Nassau County and then sells the Queens house generally does not owe city tax on that gain, although state tax still applies.

Long Island sellers

Sellers who live in Nassau or Suffolk County pay federal and state tax on any taxable gain, with no New York City income tax. The local differences on Long Island are about closing customs and property taxes, not about the income tax on the gain. The seller guides for selling a home in Nassau County and selling a home in Suffolk County cover those local steps.

Selling a two-family house in Queens: the rented unit

Two-family houses are everywhere in Queens and Brooklyn, and many owners live in one unit and rent the other. For the capital gains tax, that house is really two properties under one roof.

The owner’s unit and the rented unit are split

Publication 523 treats a rented unit in a duplex or two-family building as separate from your home. The gain is divided between your unit and the rented unit, usually in proportion to the space each one takes. The exclusion can apply to your unit. The gain on the rented unit is generally taxable and reported on Form 4797 rather than as part of the home sale.

A simple illustration

Suppose the two units are the same size, the owner lived in one for many years, and the total gain is $600,000. Roughly $300,000 belongs to the owner’s unit and can be sheltered by the exclusion. The other $300,000 belongs to the rental and is taxable, before any adjustments for the basis and expenses of that unit. Your accountant decides the method of allocation; floor area is common, but it is not the only one.

Depreciation recapture

If you rented a unit, you were allowed to depreciate it, and Publication 523 is clear that the depreciation allowed or allowable after May 6, 1997 cannot be excluded. That means even depreciation you never claimed can count against you. The gain equal to that depreciation is taxed at up to 25% federally.

A home office or a room you rented

A home office inside your own living space, or a room you rented in your own unit, is treated differently from a separate unit. You generally do not split the gain, but you still cannot exclude the depreciation you took for that space.

The practical side of selling this type of building, from the legal unit count to leases, is in the guide to selling a two-family house in Woodside.

When you moved out before selling, or rented the whole house

Life does not always line up with the two-out-of-five-year rule. Owners move in with a partner, take a job in another state, or rent the house while they decide. The dates now matter more than the price.

The three-year window

Because the use test looks at any 24 months in the five years before the sale, you can move out and still qualify if you sell within about three years of leaving. After that, the five-year window no longer contains two years of living there, and the exclusion is lost. If you moved out in early 2024, for example, your deadline falls in early 2027. Sellers racing that deadline often sell an empty house; the guide to selling a vacant house in New York covers insurance, utilities and showings.

Renting the house before you lived in it

Publication 523 has a rule for periods after 2008 when the home was not your main residence, called nonqualified use. Gain allocated to those periods generally cannot be excluded. The rule mostly catches owners who rented a property or used it as a vacation home and then moved in to claim the exclusion. Time after you move out for good, within the five-year window, is generally not counted against you.

Selling before two years: the partial exclusion

Selling sooner than two years does not always mean losing the exclusion. Publication 523 allows a reduced exclusion when the main reason for the sale is one of three situations.

The qualifying reasons

• Work: a new job or a transfer at least 50 miles farther from the home than your old job.
• Health: a move to obtain or provide treatment for illness or injury, or on a doctor’s recommendation.
• Unforeseeable events: among others, the home being destroyed or condemned, a casualty from a disaster, a death, a divorce or legal separation, multiple births from one pregnancy, or a job loss with unemployment compensation.

How the reduced amount works

The reduced exclusion is a fraction of the full amount. You take the shortest of your time living there, your time owning it, or the time since your last excluded sale, and divide it by 24 months. If you lived in the home for 12 months before a qualifying job move, half of the $250,000 limit, or $125,000, is available. The fraction applies to the limit, not to the gain, so many short-term sellers with a qualifying reason still owe nothing.

Married couples, divorce and surviving spouses

The $500,000 figure is the one most people remember, but it has conditions, and life events change them.

Married filing jointly

For the full $500,000, at least one spouse must meet the ownership test, both spouses must meet the use test, and neither may have used the exclusion on another home in the previous two years. If only one spouse meets the use test, the couple’s limit is generally figured as if each spouse had their own exclusion, which often means $250,000.

Divorce

A home transferred between spouses as part of a divorce generally keeps the original basis. The spouse who keeps the house and sells it later inherits the purchase price and improvements from the marriage, and should get copies of every record before the files are divided.

A surviving spouse

Publication 523 lets a surviving spouse claim up to $500,000 if the home is sold within two years of the spouse’s death, the survivor has not remarried, and the other conditions were met before the death. The basis also changes: when spouses owned the home jointly, the half that belonged to the spouse who died generally gets a new basis equal to its fair market value at the date of death. Those two rules together often mean a widow or widower who sells within two years owes little or nothing. Waiting past the two-year mark can cost the larger exclusion.

Selling an inherited house or a parent’s home

Heirs are often surprised by how little tax they owe, and sometimes by how much they owe on a house that was gifted rather than inherited. The difference is the basis.

Inherited: the stepped-up basis

Under Publication 523, the basis of an inherited home is generally its fair market value on the date of death, or on the alternate valuation date if the estate used one. If an estate tax return was filed or required, the value reported there is used. A house bought for a small amount decades ago can therefore have a basis close to today’s value, and a sale soon after the death produces little gain. A date-of-death appraisal by a licensed appraiser is the usual way to support that value; keep it with the estate papers.

Gifted during life: the old basis carries over

A parent who adds a child to the deed, or deeds the house to a child while alive, generally passes along the parent’s own basis. The child then sells with the original purchase price as the starting point, and may not live there long enough to use the exclusion. That one choice can create a large taxable gain that an inheritance would not have. Talk to an estate attorney before changing a deed.

The estate as seller

When the executor or administrator sells during probate, the estate is the seller and the estate files the return. The steps, documents and timing of that kind of sale are in the guide to selling an inherited house in New York, and the probate real estate page explains how I work with executors and their attorneys.

Moving out of New York before you sell: Form IT-2663

This is the step that catches sellers who retired to Florida, moved to New Jersey or relocated anywhere outside the state. New York collects an estimated tax on the gain at closing, before the deed can be recorded.

Who has to pay estimated tax

According to the New York State Department of Taxation and Finance instructions for Form IT-2663, nonresident individuals, estates and trusts must estimate the personal income tax on the gain, if any, from the sale of certain real property in New York State, and pay it with Form IT-2663. The form and full payment are submitted to the county recording officer when the deed is presented for recording. The 2026 form covers sales from January 1 through December 31, 2026.

When a nonresident is exempt

• The property was your principal residence under Section 121 in full. The instructions say a property that qualifies in total as your principal residence is exempt even if part of the gain is above the exclusion amount.
• A foreclosure or deed in lieu of foreclosure conveyed to the lender with no additional payment.
• Certain government agencies and mortgage entities as buyer or seller.

The exemption is claimed by signing the certification on Form TP-584, Schedule D, or on Form TP-584-NYC for New York City property. Residents sign the same certification to show the payment does not apply to them.

Part residence, part rental

If only part of the property was your principal residence, such as the owner’s floor of a two-family house, estimated tax is required on the gain allocated to the other part. The allocation follows the same method used for the federal return.

Not a final tax

The payment is an estimate, credited against your actual New York tax when you file your nonresident return for the year. The instructions are explicit that it cannot be refunded before that return is filed, so an overpayment ties up money until tax season.

Selling a co-op: what changes

A co-op apartment is technically shares in a corporation plus a proprietary lease, not real property with a deed. The capital gains rules still apply to a co-op you lived in, including the exclusion, but some of the paperwork is different.

The nonresident form for co-ops

The IT-2663 instructions say not to use that form for co-op shares. A nonresident selling a co-op unit uses Form IT-2664, the Nonresident Cooperative Unit Estimated Income Tax Payment Form, instead. Ask your attorney early which one applies to your sale.

Costs that are specific to co-ops

Co-op sellers face charges a house seller does not, such as a flip tax set by the building and fees from the managing agent. Whether each one is a selling expense on your return is a question for your accountant, so keep the invoices and the closing statement that shows who paid what. The time and the board review your buyer goes through are explained in the guide to the co-op board approval process in NYC.

Basis in a co-op

Your basis starts with the price paid for the shares. Improvements to the apartment that you paid for, such as a renovated kitchen or bathroom, generally add to it, and so can special assessments the building used for capital improvements. Keep the alteration agreement and the building’s letters about assessments; they explain what the money paid for.

Reporting the sale: forms at closing and at tax time

Even a sale with no tax due can come with forms. Knowing them in advance avoids surprises in April.

At the closing table

On your tax return

According to the IRS, you must report the sale if you received Form 1099-S, even when the entire gain is excluded, and you must report it whenever part of the gain is taxable. The sale goes on Form 8949 and Schedule D of Form 1040, and a rented unit’s share goes on Form 4797. Many closing agents ask a seller to certify at closing that the full gain is excludable, which can remove the need for a 1099-S; your attorney will tell you if that applies.

For a wider view of the paperwork and the order of steps, read the guide to selling a home in NYC, and for the calendar from contract to closing, the guide to how long it takes to close on a house in NYC.

The records to gather before you list

The tax is calculated after the sale, but the work that lowers it happens before. Here is the folder I suggest every seller build while the house is being prepared for the market.

1. The purchase closing statement and the deed. Your attorney’s office from the purchase, or the title company, can often send a copy if yours is lost.
2. Improvement records: contracts, invoices, cancelled checks or bank statements, and any financing used for the work.
3. The permit history for work that needed one, to confirm dates and scope.
4. Proof of residence for the two-year test: tax returns, driver’s license, voter registration and utility bills at the address.
5. Rental records for any unit or room you rented: leases, rent rolls and every return that reported the rent and depreciation.
6. Life-event documents that support a partial exclusion or a spouse’s rules: job offer, medical letter, divorce papers or a death certificate.
7. Estate papers for inherited property: the date-of-death appraisal, letters testamentary or letters of administration, and any estate tax return.
8. Co-op papers: the stock certificate, proprietary lease, alteration agreements and assessment letters.

Hand a copy of the folder to your accountant before you accept an offer. A projection at that point lets you plan the closing date and the cash you will set aside, instead of discovering the number the following spring.

The same folder makes the sale itself smoother. Buyers’ attorneys ask for permits and certificates, and having them ready shortens the contract stage. The guide on how to sell your home in Queens walks through the full preparation, and sellers who want to skip repairs can compare that path with how to sell a house as is in New York.

Common capital gains mistakes New York sellers make

The expensive mistakes are rarely about the rate. They are about dates, records and assumptions.

• Throwing away renovation receipts. Every documented improvement lowers the gain.
• Missing the three-year window after moving out. A few months can decide whether the exclusion applies at all.
• Treating a two-family house as one home. The rented unit is taxed separately, and its depreciation cannot be excluded.
• Adding a child to the deed instead of planning an inheritance. A gift carries the old basis; an inheritance generally resets it.
• Waiting past two years as a surviving spouse. The larger exclusion has a deadline.
• Learning about Form IT-2663 at the closing table. Nonresident sellers should know the estimate before signing the contract.
• Selling without a tax projection. The gain is added to that year’s income, and a different closing month can change the bracket.

If you are weighing a sale without professional help to save on costs, the guide to selling a house without an agent in New York shows which tasks shift to you, including the paperwork above.

This article is for general informational purposes only and reflects rules that may change. It is not tax, legal or financial advice; a CPA, enrolled agent or tax attorney should apply these rules to your situation, and a licensed New York real estate attorney handles the closing documents. Tax rules described here reflect the cited IRS and New York State Department of Taxation and Finance sources as of October 2026; figures in the examples are hypothetical. Real estate brokerage services are offered by Agatha Lubas, Licensed Associate Real Estate Broker, NY License #10301213345, Keller Williams Realty Liberty, 96-10 101st Avenue, Ozone Park, NY 11416. The NYS Disclosure Form for Buyer and Seller, the NYS Housing and Anti-Discrimination Disclosure / Fair Housing Notice, and the brokerage’s Standard Operating Procedures are available on request. Equal Housing Opportunity.

Agatha Lubas

Licensed Associate Real Estate Broker · NY License #10301213345 · Keller Williams Realty Liberty

Agatha Lubas works with buyers and sellers throughout Queens, Brooklyn, Nassau County and Suffolk County, coordinating attorneys, accountants, appraisers and managing agents from the first pricing conversation to closing day. She serves clients in English and Polish.

Work with Agatha