NYS Capital Gains Tax on Real Estate: Rates, Exclusions, and Recapture

The NYS capital gains tax on real estate is applied as ordinary income, at rates from 3.90% to 10.9% depending on your total earnings for the year. New York gives no preferential rate for long-held property the way the federal system does, so a gain you built over twenty years is taxed at the same rate as your salary. If the property was your primary residence, you can exclude up to $250,000 of gain ($500,000 for a married couple filing jointly), but investment properties, second homes, and gains above those thresholds are fully taxable. New York City residents owe an additional city income tax of up to 3.876% on the same gain.

Figuring the Taxable Gain

The gain is not simply the sale price minus what you paid. Start with your purchase price, add the cost of capital improvements, then subtract selling expenses from the sale price. A new roof, a kitchen renovation, or a structural repair increases your basis and lowers the taxable profit. Routine maintenance and cosmetic fixes do not count. Anything that adds value, extends the property’s useful life, or adapts it to a new use qualifies.¹

Selling costs come off the top: brokerage commissions (typically 5% to 6%), the attorney fee at closing, transfer taxes you pay as seller, title insurance, recording fees, and professional staging and marketing. Keep receipts and invoices from purchase through sale. The state can challenge anything you cannot document.

The result — sale price, minus adjusted basis, minus selling expenses — is the realized gain that flows onto your state return as income for the year of the sale.

New York State Tax Rates on the Gain

Your gain stacks on top of your wages, business income, and everything else you earned that year, and the combined total determines your bracket under Tax Law Section 601.² For tax year 2026, the brackets for single filers are:

3.90% on income up to $8,500
4.40% on income from $8,501 to $11,700
5.15% on income from $11,701 to $13,900
5.40% on income from $13,901 to $80,650
5.90% on income from $80,651 to $215,400
6.85% on income from $215,401 to $1,077,550
9.65% on income from $1,077,551 to $5,000,000
10.30% on income from $5,000,001 to $25,000,000
10.90% on income over $25,000,000

Married couples filing jointly get wider brackets; the 6.85% bracket, for example, stretches to $2,155,350 before 9.65% kicks in.²

A large real estate gain can push you into brackets you never normally touch. If your salary usually puts you at 5.90% and you sell at a $400,000 profit, a significant slice of that gain is taxed at 6.85% or higher. Sellers who know a sale is coming sometimes time other income — bonuses, retirement distributions, freelance work — to avoid piling everything into one calendar year.

The Primary Residence Exclusion

The biggest break for homeowners is the federal exclusion under Internal Revenue Code Section 121, which New York honors in full. Sell your primary home and you can exclude up to $250,000 of gain, or up to $500,000 if you are married filing jointly.³

To qualify, you must have owned the home and used it as your primary residence for at least two of the five years before the sale. The two years do not need to be consecutive.⁴ For the joint $500,000 exclusion, both spouses must meet the two-year use test, but only one needs to meet the ownership test. Neither spouse can have claimed the exclusion on another home sale within the prior two years.³

Partial Exclusion for Early Sales

If you sell before hitting two years, you may still qualify for a prorated exclusion if the sale was triggered by a work relocation, a health issue, or an unforeseen event. The IRS defines these categories specifically:⁵

A new job or transfer at least 50 miles farther from the home than your previous workplace.
A move to obtain or provide medical care for yourself or a family member, or a doctor’s recommendation of a change of residence.
Unforeseen events such as destruction or condemnation of the home, divorce or legal separation, job loss with unemployment eligibility, the death of a spouse, or multiple births from the same pregnancy.

The partial exclusion is calculated on the fraction of the two-year period you actually lived in the home. Twelve months out of twenty-four gets you half the full amount — $125,000 single, $250,000 joint.

New York City Adds Its Own Tax

City residents pay a separate city income tax on top of the state tax, and it applies to real estate gains the same way. Rates run from 3.078% to 3.876%, with the top rate reached at $50,000 for single filers and $90,000 for joint filers. A city resident selling an investment property at a large gain can face a combined state-and-city income tax rate above 14% before federal taxes are added.

Statutory Residency Traps

You do not have to consider yourself a city resident to be taxed as one. New York treats you as a statutory resident if you maintain a permanent place of abode in the state for more than ten months of the year and spend more than 183 days physically present in New York. A permanent place of abode is any dwelling with sleeping, cooking, and bathroom facilities where you have a residential interest, whether you own it, rent it, or use a family member’s. Any part of a day in New York counts as a full day, with narrow exceptions for pass-through travel. If you split time between the city and another state, crossing the 183-day line while keeping a city apartment can make your entire year’s income, including a real estate gain from anywhere, subject to city tax.

Depreciation Recapture on Rentals and Investment Property

If you claimed depreciation on a rental or investment property, the IRS recaptures that benefit when you sell. The portion of your gain attributable to prior depreciation is taxed at a flat federal rate of up to 25% — unrecaptured Section 1250 gain — before the regular long-term capital gains rate applies to the rest of the profit.

New York has no separate recapture rate. The recaptured amount simply rolls into your ordinary income for state purposes, taxed at whatever bracket your total income lands in. Because the state already taxes every gain as ordinary income, the state treatment is straightforward. The federal recapture is what catches landlords off guard, especially those who have been depreciating for a decade or more and do not realize how much of the gain will be taxed at 25% before any 15% or 20% rate touches the remainder.

Inherited and Gifted Property

Stepped-Up Basis for Inherited Property

When you inherit real estate, your basis is generally the fair market value on the date the prior owner died, not what they originally paid.⁶ If your parent bought a house in 1985 for $120,000 and it was worth $650,000 at their death, your basis is $650,000. Sell it for $680,000 and the taxable gain is $30,000, not the $560,000 gain your parent would have faced. New York and the federal government both recognize the stepped-up basis.

Carryover Basis for Gifted Property

A gift works differently. You take on the donor’s original basis and carry forward the built-in gain. If your parent gives you the same house while alive, your basis is their $120,000, and a sale at $680,000 produces a $560,000 taxable gain.⁷ If the gifted property is worth less than the donor’s basis at the time of the gift, the donor’s basis governs any gain, the fair market value at the time of the gift governs any loss, and a sale between those two figures produces neither.

Deferring the Tax With a 1031 Exchange

Investors who sell one property and buy another can defer the capital gains tax entirely using a like-kind exchange under IRC Section 1031. The replacement property must also be held for investment or business use; the exchange cannot be used for a primary residence or a vacation home.⁸

The timelines are strict. From the closing on the old property, you have 45 days to identify potential replacement properties in writing, and 180 days from the same sale date (or until your return is due, whichever comes first) to close on the replacement.⁹ Most real estate qualifies as like-kind to other real estate: vacant land for a rental building, a warehouse for an apartment complex. U.S. property cannot be exchanged for foreign property. A successful exchange defers both federal and New York tax, but the deferred gain carries into the replacement property’s basis. You are postponing the tax, not eliminating it, unless you keep exchanging or hold until death and your heirs receive a stepped-up basis.

Transfer Taxes Are a Separate Bill

Distinct from income tax, New York imposes a real property transfer tax on every conveyance. The seller pays $2 for every $500 of the sale price (about 0.4%), rising to 0.65% on sales of $3 million or more. Sales at $1 million or more also trigger a 1% mansion tax paid by the buyer. In New York City, additional transfer taxes stack on top: the city charges 1% on residential sales under $500,000 and 1.425% on sales of $500,000 or more, plus a supplemental tax on residential sales of $2 million or more ranging from 0.25% to 2.90%.¹⁰

Transfer taxes apply to the full sale price, not the gain, and they apply whether or not you made a profit. The seller’s share does count as a selling expense that lowers your taxable gain for income tax purposes.

Non-Resident Withholding at Closing

If you live outside New York but sell property inside it, you owe an estimated tax payment at closing. Non-residents file Form IT-2663 with the county recording officer when the deed is recorded, along with payment of 10.9% of the gain.¹¹

This is a prepayment, not a separate tax. It gets credited against your actual liability when you file a New York non-resident return. If your true rate is lower than 10.9%, the state refunds the difference. The state collects at the top rate upfront so out-of-state sellers do not disappear with the tax owed.¹²

You are exempt from filing IT-2663 in a few situations:

The property qualifies entirely as your principal residence under IRC Section 121, even if part of the gain exceeds the exclusion.
You are transferring the property to a mortgagee in foreclosure or in lieu of foreclosure with no additional consideration.
The buyer or seller is a U.S. or New York State agency, or a federally chartered mortgage entity like Fannie Mae or Freddie Mac.

If only part of the property qualifies as a principal residence (say, you lived in one unit of a duplex and rented the other), you still file IT-2663 and pay estimated tax on the gain allocable to the non-residential portion.¹²

Federal Tax and the Combined Rate

The state figure is only part of the bill. Federally, property held longer than a year qualifies for preferential long-term capital gains rates of 0%, 15%, or 20% depending on income; property sold under a year is taxed at ordinary federal rates up to 37%. The Section 121 primary-residence exclusion applies at the federal level too, so the same $250,000 or $500,000 of gain is shielded from both.⁴

High-income sellers also owe a 3.8% federal Net Investment Income Tax on real estate gains, applied to the lesser of net investment income or the amount by which modified adjusted gross income exceeds $200,000 (single) or $250,000 (joint). Gain excluded under Section 121 does not count.¹³ For a city resident selling an investment property at a large profit, adding the 20% federal rate, 3.8% NIIT, 10.9% state rate, and 3.876% city rate can push the combined bite to roughly 35% or more. That extreme illustrates why planning before a sale matters more than filing after one.

Filing and Avoiding Underpayment Penalties

Accurate reporting starts with records. The closing disclosure (formerly the HUD-1) is the key document: it shows the sale price, commissions, transfer taxes, attorney fees, and every other line item. Pair it with your original purchase records and improvement receipts and the Department of Taxation and Finance has what it needs.

Non-residents file Form IT-2663 at closing and later Form IT-203, the non-resident annual return, to reconcile the estimated payment against the actual liability. Form IT-2664 is used only for non-resident sales of cooperative housing corporation shares and does not apply to standard property sales.¹²

Residents do not owe a separate estimated payment at closing. They report the gain on Form IT-201, the standard annual return. If the gain is large enough to create a significant liability beyond your withholding and estimated payments, you can face an underpayment penalty. The IRS imposes a 20% penalty on any substantial understatement of tax, defined as an understatement exceeding the greater of 10% of the correct tax or $5,000, and New York has its own underpayment provisions. If you expect a large gain, an estimated tax payment for the quarter in which the sale closes is often the cheapest way to head those penalties off.

1
New York State Senate. New York Code TAX 612 – New York Adjusted Gross Income of a Resident Individual
2
New York State Senate. New York Code TAX 601 – Imposition of Tax
3
Office of the Law Revision Counsel. 26 US Code 121 – Exclusion of Gain From Sale of Principal Residence
4
Internal Revenue Service. Topic No. 701, Sale of Your Home
5
Internal Revenue Service. Publication 523, Selling Your Home
6
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
7
U.S. Government Publishing Office. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
8
Internal Revenue Service. Like-Kind Exchanges Under IRC Section 1031
9
Office of the Law Revision Counsel. 26 US Code 1031 – Exchange of Real Property Held for Productive Use or Investment
10
New York State Department of Taxation and Finance. Real Estate Transfer Tax
11
New York State Department of Taxation and Finance. Form IT-2663 – Nonresident Real Property Estimated Income Tax Payment Form
12
New York State Department of Taxation and Finance. Instructions for Form IT-2663 Nonresident Real Property Estimated Income Tax Payment Form
13
Internal Revenue Service. Topic No. 559, Net Investment Income Tax