Tax Implications of Selling Your Manhattan Apartment

Capital gains tax is the largest tax most Manhattan sellers face on a sale. Three things drive what you owe:

→ Capital gains is on the seller side, but the buyer-paid mansion tax shapes every offer above $1M. Use the NYC Mansion Tax Calculator to anticipate cliff-driven pricing pressure on your sale.

Your gain. Sale price minus closing costs minus your basis (purchase price + capital improvements + closing costs at purchase). Leaving out capital improvements or purchase closing costs overstates your gain.

Your residency status. Federal capital gains is 15%–23.8% for most sellers (20% plus the 3.8% NIIT at the top). NY State is up to 10.9%. NYC is up to 3.876%. Combined, the rates reach roughly 38.6% of the gain only above $25 million of income; for a typical high-earning couple the combined tax runs closer to 30%–35% of the gain (worked through below). For foreign sellers, the federal portion still applies plus FIRPTA withholding.

The $250K / $500K primary residence exclusion. If you owned and lived in the apartment for 2 of the last 5 years, you can exclude $250K (single) or $500K (married) of gain entirely from federal taxes. This is the biggest tax benefit available to most Manhattan sellers.

This guide walks through every tax consideration in plain English. Always consult a real-estate-specialized tax professional for your specific situation — the rules are complex and the dollar amounts at stake (often $50K–$300K+) justify a $300–$800 consultation fee.

The taxes you'll face

Selling a Manhattan apartment can trigger up to four distinct taxes:

• Federal capital gains tax — 0%, 15%, 20%, or 23.8% depending on income and length of ownership
• NY State capital gains tax — treated as ordinary income at NY State rates, up to 10.9%
• NYC personal income tax — up to 3.876% on capital gains for NYC residents
• FIRPTA withholding — 15% of gross sale price withheld at closing for non-US sellers

Plus, indirectly: the Net Investment Income Tax (NIIT) of 3.8% on top of federal capital gains for high-income filers.

Federal capital gains tax

How the gain is calculated

Gain = Sale price − Selling costs − Adjusted basis

Where: Adjusted basis = Original purchase price + Closing costs at purchase + Capital improvements.

Worked example:

• Sale price: $2,000,000
• Selling costs (broker, transfer taxes, attorney, etc.): $160,000
• Original purchase price: $1,400,000
• Closing costs at purchase: $30,000
• Capital improvements over hold period: $80,000

Adjusted basis: $1,400,000 + $30,000 + $80,000 = $1,510,000 Gain: $2,000,000 − $160,000 − $1,510,000 = $330,000

Federal capital gains rates

Long-term capital gains (asset held >1 year, which applies to virtually all real estate sales), 2026 tax year:

• 0% if taxable income is up to $49,450 single / $98,900 married filing jointly
• 15% if taxable income is $49,450–$545,500 single / $98,900–$613,700 married filing jointly
• 20% if taxable income is above those thresholds

For many Manhattan sellers, much or all of the gain sits above the 15% threshold and is taxed at 20%. The gain is stacked on top of other taxable income, so parts of it can fall in different brackets. The worked examples below use 2025 thresholds, which were slightly lower.

Net Investment Income Tax (NIIT)

If your modified adjusted gross income exceeds $200K single / $250K married joint / $125K married separate, you owe an additional 3.8% NIIT on the portion of capital gains that exceeds the threshold. For most Manhattan sellers, effective federal rate becomes 23.8%.

Short-term gains

If you held the apartment for less than one year (rare in Manhattan but happens with flip-style sales), gains are taxed as ordinary income at your marginal federal rate — up to 37% for high earners. If you're approaching one year of ownership, holding to 12+ months can save 17 percentage points in federal tax.

NY State and NYC taxes on capital gains

NY State doesn't have a separate capital gains rate. Capital gains are taxed as ordinary income.

NY State rates (single filer, 2026 tax year):

• Up to $8,500: 3.9%
• $8,500–$11,700: 4.4%
• $11,700–$13,900: 5.15%
• $13,900–$80,650: 5.4%
• $80,650–$215,400: 5.9%
• $215,400–$1,077,550: 6.85%
• $1,077,550–$5,000,000: 9.65%
• $5,000,000–$25,000,000: 10.3%
• $25,000,000+: 10.9%

For most Manhattan sellers, the relevant rate is 6.85%–10.9%.

NYC rates (2024+):

• Up to $12,000: 3.078%
• $12,000–$25,000: 3.762%
• $25,000–$50,000: 3.819%
• $50,000+: 3.876%

For most Manhattan sellers, the NYC rate is 3.876%.

Combined rate for typical Manhattan sellers

The combined rate depends on your other income, because the gain is stacked on top of it. Two reference points at 2025 rates, before deductions — an illustration, not tax advice:

• A married couple with $300,000 of other income and a $330K gain: federal ~$51.0K (15%, then 20% above $600,050 of taxable income), NIIT ~$12.5K, New York State ~$25.2K (New York's recapture taxes all $630,000 at 6.85%), NYC ~$12.8K. Total: about $101.5K, roughly 31% of the gain.
• At the top, above $25 million of income: the rates simply add: 20% + 3.8% + 10.9% + 3.876% = ~38.6%.

The primary residence exclusion (huge benefit)

If you owned and used the apartment as your primary residence for at least 2 of the last 5 years immediately preceding the sale, you can exclude:

• $250,000 of gain if filing single
• $500,000 of gain if filing married jointly

This is the single biggest tax benefit for most Manhattan sellers. It's a federal exclusion, but NY State and NYC respect the federal definition — so the excluded portion isn't taxable at any level.

Qualifying for the exclusion

Three tests:

• Ownership test: Owned the home for at least 2 years out of the 5 years preceding the sale (730 days, doesn't have to be continuous).
• Residence test: Used the home as primary residence for at least 2 years out of the 5 years preceding the sale.
• Look-back test: Haven't used the exclusion on another home sale in the 2 years preceding this sale.

What "primary residence" means

The IRS uses several factors: address on tax returns, driver's license / voter registration address, mailing address for bills, time spent at the property (relative to other properties).

Casual use ("we visit a few weekends") doesn't qualify. Ownership of an investment property doesn't qualify. A pied-à-terre that's not your primary home doesn't qualify.

When the exclusion partially applies

If you don't fully meet the 2-year tests but are selling because of change of employment (50+ miles), health (medical condition), or unforeseen circumstances (defined narrowly: divorce, death, multiple births, etc.), you may qualify for a partial exclusion prorated by months of qualifying use.

Practical example

You and your spouse bought a Manhattan apartment for $1.4M in 2019, lived there continuously, and sold for $2M in 2025. Gain is roughly $330K.

• Apply $500K married joint exclusion: full $330K excluded
• Taxable capital gain: $0
• Capital gains tax owed: $0

Same numbers but you bought as an investor and rented it out: no exclusion applies. The full $330K is taxable: about $101.5K for a couple with $300,000 of other income (the reference case above). The exclusion is a ~$100K swing in this example.

Special situations

Inherited property — basis step-up

If you inherited the apartment, your basis is the fair market value on the date of the original owner's death — not the original purchase price.

Worked example:

• Your parents bought the apartment in 1985 for $200K
• They died in 2024 when the apartment was worth $1.8M
• You inherited it
• You sell in 2026 for $1.9M

Without basis step-up: gain $1.7M = **$574K** in tax With basis step-up: gain $100K = **$32K** in tax

(Both at 2025 rates for an heir who is a NYC resident, married filing jointly, with $300,000 of other income, before deductions: federal capital gains, the 3.8% NIIT, New York State with its recapture, and NYC.)

The basis step-up is one of the largest tax benefits in the US tax code. Use it. Confirm date-of-death valuation with a qualified appraiser.

1031 exchange (investment property only)

A 1031 exchange (like-kind exchange) lets you defer all capital gains by reinvesting proceeds into another investment property. Strict rules:

• Property must have been held as investment (not primary residence)
• Replacement property must be identified within 45 days of the sale closing
• Replacement property must be received by the earlier of 180 days after the sale or the due date (with extensions) of your tax return for the year of the sale — extend the return if needed, and coordinate with the qualified intermediary
• Funds must be held by a Qualified Intermediary (QI) — not by you
• Replacement property must be of equal or greater value
• Must be like-kind real estate

Common mistakes: missing the 45-day or 180-day deadline; touching the proceeds yourself; trying to exchange into a primary residence.

A 1031 exchange can defer hundreds of thousands of dollars in tax — but only if executed properly. Hire a qualified intermediary and a real-estate-specialized tax attorney. Don't DIY this.

FIRPTA (foreign sellers)

If you're a non-US person selling US real estate, FIRPTA requires the buyer to withhold 15% of the gross sale price at closing and remit it to the IRS.

Worked example: Foreign seller closes $3M sale. Buyer withholds $450,000 at closing. Seller receives $2.55M minus other closing costs. Seller files US tax return showing actual capital gains liability and gets refund of any over-withholding.

The Withholding Certificate option: You can apply for a Withholding Certificate (Form 8288-B) before closing to reduce the withholding to your actual estimated tax liability. Apply well ahead of closing: the IRS generally acts within 90 days after receiving a complete application, and an application submitted on or before closing changes how the withheld amount is handled until the IRS decides.

If you're a foreign seller selling for $3M with an actual gain of only $500K, your real tax is ~$96K — but you'll have $450K withheld unless you get a certificate.

New York State tax can also apply to the gain on New York property, in addition to federal tax and FIRPTA withholding. NYC personal income tax depends on city residency: selling a Manhattan apartment does not by itself make a city nonresident liable for it. Determine federal, state and city status separately.

Estate sales — multiple inheritors

If multiple heirs inherit an apartment together, each inherits a proportional basis (stepped up at death). Each heir's gain is calculated based on their proportional basis. If one heir is a US resident and another is foreign, FIRPTA applies to the foreign heir's portion only.

Divorce sales

• If you sell during the marriage and file jointly: $500K exclusion applies (one filing)
• If you sell after divorce and each owns 50%: each spouse gets up to $250K exclusion ($500K total)
• If divorce decree transferred ownership to one spouse: that spouse takes over the basis

Timing of sale relative to divorce decree affects tax outcome significantly. Coordinate with your divorce attorney and tax professional.

Strategies to reduce your tax burden

1. Document every capital improvement. Each $50K of documented improvements reduces your taxable gain by $50K, saving about $17K for the couple in the worked example below (roughly 34.5% at the margin), and up to ~$19K at the top combined rate.

Capital improvements include kitchen renovations, bathroom renovations, new flooring/windows/HVAC, built-in furniture, custom millwork, capital additions. They do NOT include routine repairs, paint, fixing leaks, or minor maintenance.

Keep receipts, invoices, contractor agreements, before/after photos. If audited, you'll need documentation.

2. Time the sale around your tax year. If you'll have lower income next year, defer the sale into that year for lower marginal NY State and NYC rates.

3. Use the residence exclusion fully. Make sure you've satisfied the 2-of-5 ownership and use tests before selling.

4. Consider a 1031 exchange (investment property only).

5. Offset gains with losses. Up to $3K of net losses can also offset ordinary income.

6. Spread the gain via installment sale (rare in Manhattan but possible).

7. Charitable giving. You can donate the apartment (or partial interest) to a qualified charity, eliminate the capital gain, and receive a charitable deduction.

8. Pre-sale tax consultation. A 1-hour conversation with a real-estate-specialized accountant before you list can confirm your basis, exclusion eligibility, depreciation, residency and filing obligations. What it saves depends on your facts; no particular saving is assured. Expect a fee of roughly $300–$800.

Common seller mistakes

1. Forgetting capital improvements. Sellers without records often leave some out. Each $10K forgotten costs roughly $3.5K in unnecessary tax at a high earner's marginal rate (up to ~$3.9K at the top rate).
2. Assuming primary residence exclusion applies when it doesn't. A pied-à-terre, investment property, or short-term residence doesn't qualify.
3. Not consulting a tax professional.
4. Misunderstanding 1031 exchange rules.
5. Not factoring in NY State and NYC tax. Together they add roughly 10%–15% of the gain on top of the federal tax for a NYC resident; the combined rate tops out at ~38.6% above $25 million of income.
6. Underestimating FIRPTA impact (foreign sellers).
7. Not planning the divorce timing.
8. Using the exclusion twice in two years. You can only use the $250K/$500K exclusion once every 2 years.

When to involve a tax professional

For any of these situations, consult a real-estate-specialized accountant:

• Sale price above $2M
• Holding period under 2 years
• Multiple owners (inheritance, divorce, partners)
• Investment property
• Foreign seller status
• Trust ownership
• Mid-renovation sale
• Looking at 1031 exchange

A worked example — maximum strategy

Sarah and David, married, sell their Manhattan condo.

• Bought 2018 for $1.6M, $40K closing costs, primary residence
• Capital improvements over 7 years: $120K (kitchen renovation 2020, bathroom renovation 2022; routine painting excluded)
• Sale price 2026: $2.4M
• Selling costs: $200K

Gain calculation: Adjusted basis $1.76M. Gain = $2.4M − $200K − $1.76M = $440K.

Without the primary residence exclusion, with $300,000 of other income: Tax ~$139K at 2025 rates (federal ~$73.0K, NIIT ~$16.7K, NY State ~$32.7K, NYC ~$17.1K; about 32% of the gain) With $500K married joint exclusion (they qualify): Excluded $440K, taxable gain $0. Tax: $0

The exclusion saved them ~$139K. Worth checking if you qualify.

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If you're planning to sell in the next 12 months and want a real read on your potential tax exposure — capital gains, FIRPTA, exclusion eligibility, basis step-up, 1031 timing — schedule a consultation. We'll walk through your situation and connect you with a real-estate-specialized accountant if needed.

Disclaimer: This guide is general information only and does not constitute tax advice. Tax law is complex and changes frequently. Consult a qualified tax professional for advice specific to your situation. Real estate brokers, including The Roebling Team at Compass and the author, are not licensed tax advisors.