New York Capital Gains Tax on Inherited Property and Estate Sales

By Albert Goodwin, Esq., estate attorney in New York City, Brooklyn and Queens. Reviewed for the 2025 tax year. This page is general information, not tax advice. Dollar thresholds change every year. Confirm the figures with a CPA or tax attorney before you sign a contract of sale.

Most of what is written online about New York capital gains tax is aimed at people selling their own home or stock portfolio. This page is written for a different reader: an executor, administrator, trustee or heir who has to sell, keep or divide real property that belonged to someone who has died. The tax rules for that situation are different from the ordinary rules, and in most cases they are more favorable. The sections below cover the basis step-up under Internal Revenue Code §1014, the New York State and New York City rates that apply to any gain that remains, the choice between selling from the estate and selling after distribution, the filing duties of the fiduciary, and the common mistake of giving a house to children during life.

A short overview of how capital gains tax is computed

Capital gain is the amount realized on a sale minus the adjusted basis of the asset. The amount realized is the sale price less selling costs such as broker commission, seller-paid transfer taxes and attorney fees. Adjusted basis starts with what the owner paid, increases for capital improvements (a new roof, a kitchen renovation, an addition) and decreases for depreciation claimed if the property was rented or used in a business.

Gain on an asset held for one year or less is short-term and is taxed as ordinary income. Gain on an asset held longer than one year is long-term. Under IRC §1(h), long-term gain is taxed federally at 0%, 15% or 20% depending on taxable income. Depreciation previously deducted on real property is taxed at a federal rate of up to 25% as unrecaptured §1250 gain. A separate 3.8% Net Investment Income Tax under IRC §1411 applies to gain when modified adjusted gross income exceeds $200,000 for a single filer or $250,000 for a married couple filing jointly. Those NIIT thresholds are not indexed for inflation.

Inherited property is treated as held for more than one year no matter how quickly the heir sells it. See IRC §1223(9). Short-term treatment is never an issue for an estate or an heir.

How New York State and New York City tax capital gains

New York does not have a separate capital gains tax and does not have a preferential rate for long-term gain. A capital gain is simply added to New York adjusted gross income and taxed at the ordinary rates in New York Tax Law §601. For 2025 the State rates run from 4% to 10.9%. The 9.65% bracket begins at roughly $1,077,550 of taxable income for a single filer and $2,155,350 for a joint filer, the 10.3% bracket begins above $5 million, and the 10.9% rate applies above $25 million. A large one-time gain from the sale of a house can push a taxpayer into a higher State bracket for that year.

New York City residents pay an additional City personal income tax on the same gain at rates from 3.078% to 3.876% under New York City Administrative Code §11-1701. Yonkers residents pay a surcharge equal to a percentage of their State tax. A City resident in the top brackets can therefore pay close to 14.8% in combined State and City tax on a gain, on top of the federal 20% rate and the 3.8% NIIT.

Worked example, no inheritance involved. A couple bought a house in the Hamptons in 1970 for $200,000 and made no improvements. They sell it in 2025 for $1,500,000. Before selling costs, the gain is $1,300,000. If the house was their principal residence and they meet the two-out-of-five-year test in IRC §121, they exclude $500,000 and report $800,000. The $800,000 is taxed federally at 15% or 20%, is subject to the 3.8% NIIT to the extent their income exceeds $250,000, and is taxed by New York State at ordinary rates. If they live in Manhattan, the City tax applies as well. This same fact pattern is used in every example below so the numbers can be compared.

Why inherited property is different: the basis step-up under IRC §1014

When an owner dies, IRC §1014 resets the basis of property included in the decedent's gross estate to its fair market value on the date of death. The original purchase price no longer matters. Prior depreciation is wiped out, so there is no §1250 recapture on inherited rental property either.

Return to the Hamptons house. The owner dies in 2025 when the house is worth $1,500,000. The estate or the heir sells it a few months later for $1,500,000. The basis is $1,500,000, so the gain is zero before selling costs. If selling costs are $90,000, the sale actually produces a $90,000 loss. If the heir instead holds the house and sells it two years later for $1,600,000, the gain is $100,000, taxed as long-term gain.

The step-up is a step in both directions. If the property was worth less at death than the decedent paid for it, the basis steps down.

Documenting date-of-death value

The step-up is only as good as the proof behind it. The fiduciary should obtain a written appraisal from a licensed New York appraiser as of the date of death, even if no estate tax return is required and even if the property will be sold quickly. A broker's opinion of value is weaker evidence than an appraisal. If a New York estate tax return (Form ET-706) or a federal estate tax return (Form 706) is filed, the value reported on that return is the value the heirs are generally expected to use as basis. When a federal Form 706 is required, IRC §1014(f) and Form 8971 require that the basis the heirs report be consistent with the value finally determined for estate tax purposes.

The alternate valuation date

IRC §2032 allows an executor to value estate assets as of the date six months after death instead of the date of death. The election is available only if a federal estate tax return is filed and only if the election reduces both the gross estate and the estate tax due. For 2025 the federal basic exclusion amount is $13,990,000, so most New York estates do not file a federal return and cannot use the alternate valuation date for basis purposes. The New York estate tax threshold is lower, $7,160,000 for decedents dying in 2025, and New York's estate tax has a cliff that phases out the exclusion for estates slightly above the threshold. Estates in that range should coordinate the valuation decision with both the estate tax and the income tax consequences. See advanced New York estate planning techniques.

A house owned jointly with a spouse who has died

For a married couple who own as tenants by the entirety or as joint tenants, IRC §2040(b) includes one-half of the property in the estate of the first spouse to die. That half receives a step-up under §1014. The surviving spouse's own half keeps its original basis.

Worked example. The couple bought the Hamptons house in 1970 for $200,000. One spouse dies in 2024 when the house is worth $1,500,000. The survivor's basis is now $850,000: the survivor's own half of the original cost ($100,000) plus the stepped-up half inherited from the decedent ($750,000). If the survivor sells in 2025 for $1,500,000, the gain is $650,000 before selling costs, not $1,300,000.

The §121 exclusion can reduce that figure further. Under IRC §121(b)(4), a surviving spouse who has not remarried may still use the $500,000 married exclusion if the sale closes within two years of the date of death and the ownership and use tests were met before the death. That reduces the $650,000 gain to $150,000. If the sale closes more than two years after the death, only the $250,000 single exclusion is available and the taxable gain is $400,000.

For co-owners who were not married to each other, IRC §2040(a) includes the property in the decedent's estate in proportion to the decedent's contribution to the purchase price, and only that included portion is stepped up. Records of who paid what matter. See house in two names.

Selling the decedent's home from the estate

An executor or administrator with letters from the Surrogate's Court has authority under EPTL 11-1.1(b)(5) to sell estate real property unless the will provides otherwise. Before contract, the fiduciary should obtain an employer identification number for the estate (Form SS-4), file IRS Form 56 giving notice of the fiduciary relationship, and have the date-of-death appraisal in hand. See letters testamentary and estate administration.

When the estate sells, the gain or loss is reported on the estate's federal fiduciary income tax return, Form 1041, Schedule D, and on the New York fiduciary return, Form IT-205. Because of the step-up, the gain is usually small or there is a loss once commissions and transfer taxes are subtracted from the sale price. A loss on the sale of a decedent's residence may be deductible as a capital loss by the estate if the property was held for sale and was not used as a personal residence by a beneficiary after death. If a beneficiary lived there rent-free during the administration, the deduction is at risk.

An estate cannot claim the §121 exclusion. Section 121 is available to individuals, and the regulations extend it only to trusts treated as owned by the taxpayer under the grantor trust rules during the taxpayer's life. After death the exclusion is gone. The step-up usually makes this irrelevant, but it matters when a house appreciates sharply between death and sale.

If gain does remain in the estate, two features of fiduciary taxation work against it. First, the income tax brackets for estates and trusts are compressed. The 20% federal long-term rate applies to an estate once its taxable income exceeds roughly $15,900 in 2025, a threshold an individual does not reach until several hundred thousand dollars. Second, the 3.8% NIIT applies to an estate's undistributed net investment income above the dollar amount at which its top income tax bracket begins, a figure adjusted annually and currently a little over $15,000. Under Treasury Regulation §1.643(a)-3, capital gains are ordinarily allocated to principal and taxed to the estate rather than carried out to beneficiaries, unless the governing instrument or local law permits a different allocation, the fiduciary consistently treats gains as distributable, or the sale occurs in the estate's final year. A fiduciary who expects a meaningful gain should discuss the timing of the sale and the timing of distributions with the estate's accountant before closing.

For New York purposes, an estate is a resident estate if the decedent was domiciled in New York at death (Tax Law §605(b)(3)). A resident estate pays New York tax on all of its income. A nonresident estate pays New York tax only on New York source income, which includes gain from the sale of New York real property, and must comply with the nonresident withholding rule described below.

Distributing the house first and selling later

The alternative is for the executor to deed the property to the beneficiaries and let them sell. The beneficiaries take the estate's stepped-up basis, so the tax result on an immediate sale is roughly the same. The difference appears when the beneficiaries hold the property.

• Beneficiary moves in: a beneficiary who makes the inherited house a principal residence and meets the two-year ownership and use tests can later claim his or her own §121 exclusion. See beneficiary living in the inherited house.
• One sibling buys out the others: the selling siblings report gain equal to the buyout price less their share of the date-of-death value. The buyer's basis in the purchased share is what he or she paid. See buyout of an inherited residence.
• Beneficiaries cannot agree: a partition action can force a sale, with each co-owner reporting his or her own share of any gain. See partition of real property.
• Beneficiary wants to keep the house but needs cash: borrowing against the property is not a taxable event. See borrowing against inherited property.
• Beneficiary lives outside New York: a nonresident heir who sells New York real property must make the estimated payment described in the next section at closing.

Each beneficiary reports his or her share of gain on a personal return at individual rates, which are less compressed than estate rates. For a large gain, distributing before sale often produces a lower combined bill than selling inside the estate. For a small gain, it rarely matters, and selling from the estate is simpler.

New York closing costs that affect the gain

Several New York taxes are collected at closing. They are not capital gains taxes, but they change the gain calculation and they catch nonresident sellers off guard.

• New York State real estate transfer tax: $2 for each $500 of consideration (0.4%) under Tax Law §1402, paid by the seller. An additional 0.25% applies to residential conveyances in New York City of $3,000,000 or more. Seller-paid transfer tax is a selling expense and reduces the amount realized.
• New York City Real Property Transfer Tax: 1% of consideration for residential property under $500,000 and 1.425% at $500,000 and above, paid by the seller under Administrative Code §11-2102. Also a selling expense.
• Mansion tax: 1% of consideration on residential property sold for $1,000,000 or more under Tax Law §1402-a, with graduated New York City rates under §1402-b rising to 3.9% at $25,000,000 and above. The mansion tax is the buyer's obligation and does not affect the seller's gain unless the seller agrees in the contract to pay it.
• Nonresident estimated tax, Form IT-2663: under Tax Law §663, a nonresident individual, estate or trust selling New York real property must compute the estimated New York tax on the gain at the highest State rate (10.9%) and pay it at closing. Form IT-2664 serves the same function for cooperative apartments. The payment is a prepayment, not an extra tax. The seller claims it as a credit on the nonresident return (Form IT-203 or IT-205) and recovers any excess. An exemption is available if the property was the seller's principal residence qualifying under §121, and for certain other transfers listed on the form. An out-of-state executor of a New York decedent's estate is often a New York resident estate for this purpose because residency follows the decedent's domicile, but an estate of a nonresident decedent selling a New York vacation home is a nonresident estate and must file.

The gifting trap: why giving the house to your children during life costs them the step-up

Parents frequently ask about deeding the family home to their children now to avoid probate or to plan for long-term care. The income tax cost of that gift is often larger than the problem it is meant to solve.

Property received by gift takes a carryover basis under IRC §1015. The child inherits the parent's basis, not the current value. Worked example. A parent deeds the Hamptons house, purchased in 1970 for $200,000, to a daughter in 2025. The daughter sells it after the parent's death for $1,500,000. Her basis is $200,000 and her gain is $1,300,000. Because she never lived there, §121 does not help. Federal tax at 20% plus the 3.8% NIIT plus New York State tax at rates up to 10.9%, and City tax if she lives in the five boroughs, can consume well over $400,000 of the proceeds. Had the parent kept title and left the house by will or trust, the daughter's basis would have been $1,500,000 and the gain would have been close to zero. A gift of that size also requires a federal gift tax return (Form 709) because it exceeds the $19,000 annual exclusion for 2025, although no gift tax is usually due.

Several alternatives preserve the step-up while addressing the parent's concerns:

• Revocable living trust: the house avoids probate, the parent keeps control, and because the trust is revocable the property is included in the parent's gross estate under IRC §2038 and receives a full step-up. See benefits of a living trust and avoiding probate in New York.
• Deed with a retained life estate: the parent keeps the right to live in the house for life and the remainder passes to the children at death without probate. Because the parent retained the life interest, IRC §2036 includes the full value in the parent's estate and the children receive a full step-up. The transfer does start New York's Medicaid look-back period for nursing home care, and the parent cannot sell or mortgage without the children's consent, so this tool has to be weighed carefully.
• Irrevocable trust: the step-up is available only if the trust is drafted so the property is included in the parent's gross estate, for example through a retained interest or a power of appointment. Revenue Ruling 2023-2 confirms that assets in an irrevocable grantor trust that are not included in the gross estate do not receive a step-up. A Medicaid asset protection trust must be drafted with this ruling in mind.

Strategies that commonly apply, and strategies that usually do not

Reconstruct the basis

Before any other planning, gather proof of basis. For a decedent's property this is the date-of-death appraisal. For property owned during life, it is the closing statement from the purchase plus receipts, contracts and permits for every capital improvement. Repairs and maintenance do not count. Improvements do. A decedent's files, old insurance claims and building department records are the usual sources.

The §121 exclusion, including the partial exclusion

An owner who lived in the home as a principal residence for at least two of the five years before sale may exclude $250,000 of gain, or $500,000 on a joint return. Under IRC §121(c), an owner who fails the two-year test can claim a prorated exclusion if the sale was caused by a change in place of employment, health, or unforeseen circumstances as defined in the regulations, which include death of a co-owner, divorce and certain multiple births. A surviving spouse's two-year window and a beneficiary's own future exclusion were discussed above.

Harvest capital losses

Capital losses offset capital gains dollar for dollar under IRC §1211, and up to $3,000 of excess loss offsets ordinary income each year with the balance carried forward under IRC §1212. Corrected worked example. The sale of the Hamptons house produces a $1,300,000 gain. The seller also holds stock bought in 2019 for $100,000 that is now worth $5,000. Selling the stock in the same tax year produces a $95,000 loss and reduces the taxable gain to $1,205,000. New York follows the federal computation of gain and loss, so the offset reduces State and City tax as well. Selling a loss position and buying it back within 30 days triggers the wash-sale rule in IRC §1091 and disallows the loss.

Time the sale and consider an installment sale

Because New York taxes gain at ordinary rates with no long-term preference, the year of sale affects the State bill as much as the federal one. A retiree with low income in a particular year will pay less than a seller who closes in a year with large bonus income. An installment sale under IRC §453, in which the seller takes back a purchase-money mortgage and receives payments over several years, spreads the gain and may keep the seller out of the top brackets. New York recognizes installment reporting, but nonresidents should review the IT-2663 instructions for how the estimated payment is computed on an installment sale.

Section 1031 like-kind exchange: investment property only

IRC §1031 allows an owner of real property held for investment or for use in a trade or business to defer gain by exchanging it for other real property of like kind. The rules are strict. The seller may not touch the sale proceeds and must use a qualified intermediary. Replacement property must be identified in writing within 45 days after the sale closes, and the purchase of the replacement must close within 180 days after the sale or by the due date of the seller's tax return for that year, including extensions, whichever is earlier. Since 2018 only real property qualifies. A personal residence, including the Hamptons house in the examples above, is not eligible. For inherited property, §1031 is rarely needed because the step-up has already eliminated most of the gain, but it is useful for an heir who receives a rental building, holds it for years, and then wants to trade into a different building.

Deferred sales trusts: proceed with caution

A deferred sales trust is a marketed arrangement, not a term found in the Internal Revenue Code. The seller transfers property to a trust in exchange for an installment note, the trust sells the property to the ultimate buyer, and the seller reports gain only as note payments are received under §453. The IRS has questioned these structures, and the result depends on the trust being genuinely independent of the seller. For most families selling a home or an inherited property, the fees and audit risk outweigh the benefit. Anyone considering one should have it reviewed by a tax attorney who did not sell it to them.

Executor and administrator tax checklist

1. Obtain an EIN for the estate and file IRS Form 56.
2. Order a date-of-death appraisal for each parcel of real property and keep it in the permanent estate file.
3. File the decedent's final personal returns, federal Form 1040 and New York Form IT-201, for the year of death.
4. Determine whether a New York estate tax return (Form ET-706) is required. For 2025 the filing threshold is a gross estate above $7,160,000, and the return is due nine months after death. Determine separately whether a federal Form 706 is required.
5. File federal Form 1041 for each year the estate has gross income of $600 or more, reporting the sale on Schedule D and issuing Schedule K-1 to any beneficiary who received a distribution.
6. File New York Form IT-205 for each year the estate must file a federal Form 1041 and is either a New York resident estate or a nonresident estate with New York source income.
7. Consider electing a fiscal year for the estate on the first Form 1041, which can shift the reporting of a sale into a later calendar year for the beneficiaries.
8. If the estate is a nonresident estate selling New York real property, complete Form IT-2663 and deliver the estimated payment at closing.
9. Keep the closing statement. Commissions, transfer taxes and legal fees reduce the gain and must be documented.

For how these steps fit into the overall timeline of a New York estate, see a sample NYC probate timeline.

Frequently asked questions

Do I pay capital gains tax on a house I inherited in New York?

Only on appreciation after the date of death. Your basis is the fair market value when the owner died under IRC §1014. If you sell for roughly that value within a year or so, the gain is close to zero and selling costs may create a small loss. If you hold the house and it appreciates, the gain above the date-of-death value is taxed federally as long-term gain and by New York State at ordinary rates, with New York City tax added if you are a City resident.

Does New York have a separate capital gains tax rate?

No. New York State and New York City tax capital gains as ordinary income. There is no reduced rate for long-term gains. State rates run from 4% to 10.9% under Tax Law §601, and City resident rates run from 3.078% to 3.876%.

Does an estate pay capital gains tax when it sells the decedent's home?

Yes, if there is a gain after the step-up and after selling costs. The estate reports the sale on federal Form 1041 and New York Form IT-205. Estate tax brackets are compressed, so any gain that is retained in the estate reaches the top federal rate and the NIIT quickly. In most estates the gain is small because the sale price is close to the date-of-death value.

Can the estate use the $250,000 or $500,000 home sale exclusion?

No. The §121 exclusion is for individuals. A surviving spouse may use the $500,000 exclusion on a sale within two years of the first spouse's death. A beneficiary who moves into the inherited house and lives there for two years may qualify for his or her own exclusion later.

My parent wants to put the house in my name now. Is that a good idea?

Usually not from an income tax standpoint. A lifetime gift carries over the parent's original basis under IRC §1015, so you would pay tax on decades of appreciation when you sell. Inheriting the house at death gives you a stepped-up basis. A revocable trust, a life estate deed, or a properly drafted irrevocable trust can address probate avoidance or Medicaid planning without losing the step-up.

I live in New Jersey and inherited an apartment in Queens. What happens at closing?

As a nonresident seller you must file Form IT-2663 (or IT-2664 for a co-op) and pay estimated New York tax on the gain at 10.9% at closing. Because your basis is the date-of-death value, the gain and therefore the payment may be small. You then file a New York nonresident return (Form IT-203) and claim the payment as a credit. New Jersey will also tax the gain and generally allow a credit for the New York tax paid.

Does New York estate tax have anything to do with capital gains tax?

They are separate taxes with one connection. The value reported on the New York estate tax return, if one is filed, is the value the heirs are expected to use as their income tax basis. A higher reported value increases estate tax exposure but lowers future capital gains. Estates near the $7,160,000 New York threshold should weigh both.

How our firm can help

The Law Offices of Albert Goodwin represents executors, administrators, trustees and heirs in New York estate matters, including the sale and division of estate real property. We obtain letters from the Surrogate's Court, coordinate appraisals and closings, and work with the estate's accountant on the fiduciary returns described above. We have offices in New York City, Brooklyn and Queens. Call 212-233-1233 or email email@nyestateslawyer.com to discuss your estate.

Statutory references: IRC §§1(h), 121, 453, 1014, 1015, 1031, 1091, 1211, 1212, 1223, 1250, 1411, 2032, 2036, 2038, 2040; Treas. Reg. §1.643(a)-3; Rev. Rul. 2023-2; N.Y. Tax Law §§601, 605, 663, 1402, 1402-a, 1402-b; N.Y.C. Admin. Code §§11-1701, 11-2102; EPTL 11-1.1. Thresholds and rates cited are for 2025 and are adjusted annually. This page does not create an attorney-client relationship.