Capital Gains on Your NYC Home Sale: The $250K/$500K Exclusion Explained
New York City appreciation means many long-time owners face a real capital gains bill. The good news: if the apartment is your primary residence, federal law lets you exclude a substantial chunk of the gain.
The exclusion (IRC §121)
You may generally exclude up to:
$250,000 of gain if single
$500,000 if married filing jointly
To qualify, you must meet both tests:
Ownership test: you owned the home for at least 2 of the last 5 years before the sale.
Use test: you used it as your principal residence for at least 2 of the last 5 years (the 24 months need not be continuous).
For married couples claiming $500,000, generally both spouses must meet the use test, at least one must meet the ownership test, and neither may have used the exclusion on another sale within the prior two years.
Frequency: you can use the exclusion only once every two years.
Partial exclusions
If you fall short of two years because of a change in place of employment, health reasons, or certain unforeseen circumstances, you may qualify for a prorated exclusion — e.g., 12 months of qualifying use could yield roughly half the normal exclusion. The rules are specific; this is CPA territory.
Calculating your gain
```
Amount realized = sale price − selling costs
Adjusted basis = purchase price + closing costs at purchase + capital improvements − any depreciation taken
Gain = amount realized − adjusted basis
Taxable gain = gain − §121 exclusion (if eligible)
```
Selling costs that reduce your amount realized include broker commission, NYC and NYS transfer taxes, flip tax, and attorney fees — a big deal in NYC, where these run 8%–10% of price.
Basis additions most NYC owners forget:
The mansion tax you paid when you bought (generally added to basis)
Purchase-side attorney fees, title insurance, and recording costs
Capital improvements — kitchen and bath renovations, new HVAC, built-ins, flooring, combining units. Repairs and routine maintenance don't count.
Special assessments paid for capital improvements to the building (as opposed to operating expenses)
Keep records. Renovation invoices from 2011 are worth real money in 2026. Reconstructing them later is painful.
Worked example
Married couple, bought a co-op in 2012 for $700,000, selling in 2026 for $1,600,000.
Purchase price $700,000 + purchase closing costs ~$12,000 + renovations $150,000 + capital assessment $18,000 = adjusted basis $880,000
Sale price $1,600,000 − selling costs (~9%, about $144,000) = amount realized $1,456,000
Gain = $576,000
Less $500,000 exclusion = $76,000 taxable
Without tracking the renovations and assessment, their gain would have looked like $744,000 and their taxable gain $244,000 — a difference of roughly $168,000 in taxable income.
The tax on what's left
Federal long-term capital gains: 0%, 15%, or 20% depending on total income
Net Investment Income Tax: an additional 3.8% for higher-income taxpayers
New York State income tax: capital gains are taxed as ordinary income at NYS rates
New York City income tax: NYC residents also pay city income tax on the gain
Depreciation recapture: if you ever rented the unit and took depreciation, that portion is recaptured (generally up to 25%) and is not covered by the §121 exclusion
Also note: transfer taxes and the flip tax are separate from income tax — they're transaction costs, already accounted for in the calculation above.
Situations that need professional advice
You rented the apartment for part of the period — nonqualified use rules can reduce the exclusion, and depreciation recapture applies
Inherited property — a stepped-up basis usually applies at date of death, often eliminating gain
Divorce or death of a spouse — special rules can preserve the $500,000 exclusion for a surviving spouse for a limited period
You're selling an investment property — §121 doesn't apply, but a §1031 exchange may (investment property only, never a primary residence)
You're a nonresident of New York — expect estimated tax withholding at closing (Form IT-2663); foreign sellers face FIRPTA
The action items
Find your closing statement from when you bought, and the mansion tax line.
Pull together every renovation invoice and capital assessment notice.
Confirm your 2-of-5-year eligibility on the calendar before you list.
Run the numbers with your CPA before you sign a contract, not in April.
This article is for general informational purposes only and does not constitute tax or legal advice. Tax rules are complex and fact-specific. Consult a licensed CPA or tax attorney. Sources: IRC §121; IRS Publication 523; NYS Form IT-2663. As of August 2026.
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