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). Most sellers have a smaller "gain" than they think because they forget capital improvements and closing costs.

Your residency status. Federal capital gains is 20%–23.8%. NY State is up to 10.9%. NYC is up to 3.876%. Combined for high earners: roughly 38.6% of the gain. 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):

• 0% if taxable income is under $47,025 single / $94,050 married
• 15% if taxable income is $47,025–$518,900 single / $94,050–$583,750 married
• 20% if taxable income is above those thresholds

For most Manhattan sellers (whose incomes typically place them in the top brackets), the federal rate is 20%.

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):

• Up to $8,500: 4.0%
• $8,500–$11,700: 4.5%
• $11,700–$13,900: 5.25%
• $13,900–$80,650: 5.5%
• $80,650–$215,400: 6.0%
• $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

Federal (20%) + NIIT (3.8%) + NY State (~6.85%) + NYC (3.876%) = ~34.5%–38.6% combined.

On a $330K gain: roughly $114K–$127K in total capital gains tax.

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. Full $330K subject to ~38.6% combined tax = ~$127K in tax. The exclusion is a $127K 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, taxed at 38.6% = **$656K** With basis step-up: gain ~$100K, taxed at 38.6% = **$38.6K**

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 acquired within 180 days of the sale closing
• 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. Requires submission to IRS at least 90 days before closing; approval typically 60–120 days.

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.

Foreign sellers also still owe NY State and NYC capital gains tax on the gain, in addition to federal/FIRPTA.

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 ~$19K at combined ~38.6% 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 typically saves $10K–$100K+ in tax. Worth the $300–$800 fee.

Common seller mistakes

1. Forgetting capital improvements. Most sellers forget at least 30–50%. Each $10K forgotten = ~$3.9K unnecessary tax.
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. Plan for the full ~38.6% combined rate.
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 (renovated kitchen 2020, bathroom 2022, fresh paint 2024)
• Sale price 2026: $2.4M
• Selling costs: $200K

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

Without primary residence exclusion: Tax ~$170K (38.6% × $440K) With $500K married joint exclusion (they qualify): Excluded $440K, taxable gain $0. Tax: $0

The exclusion saved them $170K. 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. Tax planning before listing typically saves more than the broker commission.

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.