Inheriting a house or apartment in New York often comes with a welcome surprise: the step-up in basis usually means little or no capital gains tax if the property is sold soon after the owner's death. That doesn't mean the sale is tax-free across the board, and a few traps catch heirs who assume the step-up handles everything.
The step-up does most of the heavy lifting
When someone dies owning real estate, the property generally receives a new basis equal to its fair market value on the date of death. If heirs sell shortly afterward at close to that appraised value, there is typically little or no capital gains to report, even if the original owner purchased the property decades earlier for a small fraction of its current worth. This is one of the most valuable features of inheriting property rather than receiving it as a lifetime gift, since a gifted property would have carried the giver's original, much lower basis.
Where taxes still show up
- Any appreciation between the date of death and the date of sale is taxable as capital gain, so a property that sits unsold for a year or two while gaining value in a hot New York market can generate real tax on that later increase
- New York State transfer tax, and the New York City transfer tax for property in the five boroughs, apply to the sale itself, calculated on the sale price, regardless of the seller's basis or gain
- If the estate itself was large enough to owe federal or New York estate tax, the real estate's value was already accounted for in that calculation before the step-up ever comes into play for the heirs
- Selling expenses, including broker commissions and closing costs, reduce the taxable gain and should be tracked carefully alongside the appraisal used to establish the stepped-up basis
Special issues for out-of-state or foreign heirs
Heirs who are not New York residents, or who are not US persons at all, face additional withholding requirements when selling New York real estate, separate from the underlying capital gains calculation. Non-resident sellers are generally subject to estimated tax withholding at the closing table, which is reconciled later when the actual tax return is filed. For heirs who are non-resident aliens rather than US citizens or residents, the interaction between US withholding rules and their home country's tax treatment of the sale adds another layer of complexity worth reviewing before listing the property.
Getting a qualified appraisal as close to the date of death as possible is one of the simplest ways heirs protect themselves, since it establishes the stepped-up basis clearly and reduces disputes with the IRS or New York State over the reported gain later. For estates with real estate as a major asset, coordinating the appraisal, the estate tax filing, and the eventual sale can make a meaningful difference in what heirs keep. See our estate and gift tax planning services and our New York estate tax cliff guide for how real estate value factors into the broader estate tax picture.
If you've inherited New York real estate and are weighing whether to sell, get the tax picture right first. Schedule a free consultation or call +1 212 518 3868.
