Selling a rental building in New York City triggers more than a single capital gains line. A landlord who has owned a Bronx multifamily property or a Queens two-family house for a decade is usually looking at federal capital gains tax, New York State and City income tax on the same gain, depreciation recapture on top of that, and the city and state transfer taxes due at closing, all landing in the same tax year unless the sale is structured differently ahead of time. Each piece is calculated separately, and skipping one in the initial estimate is the most common reason a seller is surprised by the number their accountant produces the following spring.
Federal Capital Gains on the Sale
The federal gain is the sale price minus selling costs minus adjusted basis, where adjusted basis is original purchase price plus capital improvements minus depreciation already claimed. A rental held more than a year qualifies for long-term rates, which top out well below ordinary income rates for a high earner, but the depreciation portion of that gain is carved out and taxed separately under a different set of rules, described below.
New York State and City Add Ordinary-Income Tax on Top
Unlike the federal system, New York does not tax long-term capital gains at a reduced rate. The gain is added to the seller's other income and taxed at ordinary state rates, and if the seller is a New York City resident, city income tax applies as well, stacking on top of the state liability. A landlord who owns the rental through an out-of-state LLC is still generally subject to New York's nonresident withholding and filing rules on the sale of New York real property, so moving title offshore or upstate does not remove the property's own tax exposure.
Depreciation Recapture on a Long-Held Rental
Every year a rental is depreciated for tax purposes, that deduction reduces the property's basis, and when the property sells, the accumulated depreciation is recaptured and taxed at a federal rate capped at 25 percent, separate from and generally higher than the long-term capital gains rate applied to the rest of the gain. A landlord who owned a Staten Island rental for twenty years and depreciated it fully has often built up substantial recapture exposure that catches first-time sellers off guard, since it applies regardless of whether the sale itself produces a large or modest overall gain.
Transfer Taxes Reduce Net Proceeds Before Gain Is Even Calculated
New York State's transfer tax and New York City's Real Property Transfer Tax both apply to the sale, with the city's rate stepping up on higher-value transactions and on transfers of properties with three or more residential units. These transfer taxes are typically paid by the seller and are deductible as selling costs against the gain, which softens but does not eliminate their bite. On a large multifamily sale, the combined state and city transfer tax stack can represent a meaningful percentage of the sale price before any income tax is even calculated.
Deferring the Entire Gain With an Exchange
A rental property held for investment is exactly the kind of asset a 1031 exchange is built for. Rolling the sale proceeds into a replacement property through a qualified intermediary defers the federal and state gain, defers the depreciation recapture, and lets the landlord redeploy the full pre-tax proceeds rather than the after-tax remainder into a new asset, whether that is another New York City building, an out-of-state property, or a passive Delaware Statutory Trust allocation.
Common 1031 Exchange Questions
Is depreciation recapture taxed differently from the rest of the capital gain on a rental sale?
Yes. Recaptured depreciation on real property is taxed federally at a rate capped at 25 percent, which is generally higher than the long-term capital gains rate applied to the appreciation portion of the same sale, and it applies whether or not the sale as a whole produced a large gain.
Does New York City tax capital gains at a lower rate than ordinary income?
No. New York State and City tax capital gains as ordinary income, with no reduced long-term rate at the state or local level. The federal reduced rate for long-term gains does not carry over to the state and city return.
Who pays the New York City transfer tax on a rental property sale?
The seller typically pays both the New York State transfer tax and the New York City Real Property Transfer Tax, though this is negotiable in the purchase contract. The rate depends on the sale price and, for larger transactions, on the type and size of the property.
Can a landlord defer depreciation recapture along with the capital gain?
Yes, when the sale is structured as part of a 1031 exchange. Both the capital gain and the depreciation recapture are deferred together as part of the same transaction when the exchange follows the identification and closing deadlines and proceeds pass through a qualified intermediary.
