Selling Your House on Long Island: What the Tax Bill Could Look Like

Long Island home prices have risen sharply over the past decade. Nassau County median sale prices are running roughly $852,000 as of spring 2026. Suffolk is around $715,000. For homeowners who bought fifteen or twenty years ago, the gap between what they paid and what they can sell for has grown into a number that carries real tax consequences.

Most homeowners know there is a federal tax break on profits from the sale of a primary residence. Fewer people know exactly how it works, where it stops, or what New York State does on top of it. If you are thinking about selling, the time to understand the tax picture is before you close.

The Federal Exclusion: What It Covers and What It Does Not

Under Section 121 of the Internal Revenue Code, homeowners who meet the ownership and use requirements can exclude up to $250,000 of home sale gain from federal income tax if filing single, or up to $500,000 for married couples filing jointly.

To qualify, you must have owned and used the home as your primary residence for at least two years out of the five years immediately before the sale. The two years do not need to be consecutive. Short absences, including vacations and temporary relocations, generally still count as periods of use. You can only use the exclusion once every two years.

The exclusion does not cover every gain on every sale. Consider a couple who bought a Nassau County home in 2008 for $400,000 and sells it today for $840,000. Their gain is $440,000. The $500,000 joint exclusion covers it entirely and they owe no federal capital gains tax on the sale. The same sale for a single filer produces a $190,000 taxable gain after the $250,000 exclusion is applied. At a 15% long-term capital gains rate, that is $28,500 in federal tax.

For homeowners who bought even earlier, or who made significant improvements and are now selling at today's prices, gains above the exclusion threshold are not unusual on Long Island. The exclusion has not been adjusted for inflation since 1997.

How Your Gain Is Actually Calculated

The taxable gain is not simply the difference between your sale price and what you originally paid. Your cost basis includes the original purchase price plus certain closing costs from when you bought, plus the cost of any capital improvements you made over the years. Improvements that add value or extend the life of the property, such as a new roof, an addition, a finished basement, or a kitchen renovation, increase your basis and reduce your taxable gain.

What does not increase your basis: minor repairs, repainting, or fixing a broken component generally do not increase basis unless they are part of a larger capital improvement project. Routine upkeep keeps the house in condition but does not add to its value in the eyes of the tax code.

On the sale side, certain selling expenses reduce your net proceeds for tax purposes. Broker commissions, legal fees, transfer taxes, and other transaction costs come off the top. The gain the IRS taxes is what remains after subtracting your adjusted basis from your adjusted sale proceeds.

Documentation matters here. If you cannot substantiate the cost of improvements you made ten or fifteen years ago, you cannot add them to your basis. Receipts, contracts, and permit records from renovation work have real dollar value when you eventually sell.

The Depreciation Recapture Problem

If you ever used any part of your home for business or rented it out and claimed depreciation deductions, the IRS requires you to recapture that depreciation when you sell. This portion of the gain, known as Unrecaptured Section 1250 Gain, is taxed at a maximum rate of 25%, regardless of your ordinary income tax bracket or long-term capital gains rate.

This catches people who converted a property from rental to primary residence, or owned a two-family home and lived in one unit while renting the other. For property that was rented or used as a separate business structure, the Section 121 exclusion does not apply to the gain allocable to that portion. For a home office within the dwelling unit, the exclusion does apply to the gain, but any depreciation actually claimed still must be recaptured and is taxed at the maximum 25% rate. Either way, the depreciation does not disappear.

The Net Investment Income Tax

High-income sellers may owe an additional 3.8% Net Investment Income Tax on the taxable portion of the gain. This applies to single filers with modified adjusted gross income above $200,000 and joint filers above $250,000. The NIIT applies after the Section 121 exclusion, not to total sale proceeds. For sellers already above those income thresholds, a large taxable gain can add meaningfully to the federal bill.

What New York State Does with the Gain

New York State recognizes the Section 121 exclusion the same way the federal government does. If your gain is fully covered by the exclusion, there is generally no New York State income tax on the sale either.

Where New York diverges from federal treatment is in how it taxes whatever remains. The federal government gives long-term capital gains preferential rates of 0%, 15%, or 20% depending on income. New York does not. The state taxes all capital gains as ordinary income, at progressive rates ranging from 4% to 10.9% in 2026. There is no reduced state rate for long-term gains.

That matters for the single-filer example above. The $190,000 taxable gain that generates a 15% federal rate could face a 6% to 9% New York State rate on top of that, depending on total income for the year. The combined federal and state tax on that portion of the gain is real money, and it does not show up on a closing disclosure.

Partial Exclusion and Special Situations

Not everyone has owned their home for two full years before selling. The IRS allows a partial exclusion when the sale is driven by a change in employment, a health issue, or other unforeseen circumstances. The partial exclusion is calculated proportionally: if you owned and used the home as your primary residence for one year instead of two and the sale qualifies under a permitted reason, you may be able to exclude up to half the normal limit.

Divorce creates its own set of rules. When a home is transferred between spouses as part of a divorce settlement, the receiving spouse inherits the transferring spouse's ownership period for purposes of the two-year test. Use is more nuanced: under IRS rules, a spouse who is granted use of the property under a divorce or separation instrument is treated as using it as a primary residence for purposes of the other spouse's use test. That said, each person must independently satisfy the requirements that apply to them when the sale actually occurs. After divorce, each files as single and can exclude up to $250,000 of gain individually, provided both tests are met. The spouse who moves out well before the sale may lose use-test eligibility depending on how much time has passed.

Inherited homes are treated differently. Property received through an estate gets a stepped-up basis to the fair market value at the date of death. If the heir sells shortly after inheriting and the value has not changed significantly, the taxable gain may be small. The two-year ownership and use test does not apply in the same way to inherited property, but the Section 121 exclusion is only available if the heir subsequently uses the property as a primary residence for the required period.

The Year You Sell Is the Year It Hits Your Return

A taxable gain from a home sale is generally reported in the year the sale closes, regardless of when you receive the proceeds. One exception: if the sale is structured as an installment sale with payments spread over time, the gain may be reported across multiple years unless the taxpayer elects to recognize it all in the year of sale. If you close in 2026 under a standard sale, the gain appears on your 2026 return. For sellers with other significant income that year, the additional gain can push them into higher federal and state brackets, affect eligibility for certain deductions, or trigger the Net Investment Income Tax even if they would not otherwise be subject to it.

The timing of a sale within a year can also matter. If you expect your income to be substantially lower in the following year, closing in January instead of December changes which tax year the gain lands in. That is worth knowing before you set a closing date.

Know the Number Before You Close

A home sale on Long Island can generate a substantial gain even after the Section 121 exclusion. What you owe depends on how long you owned it, how you used it, what improvements you made, what your income looks like the year you sell, and whether New York State takes a cut on top of the federal tax. Getting that number right before closing gives you options. Getting it wrong leaves you with a bill you did not see coming.

Gregg Jaffe Tax Services works with homeowners across Plainview and Long Island on the tax side of home sales, including basis calculations, gain projections, and state tax implications, before the closing date, not after. Gregg has been preparing taxes for Long Island individuals, families, and small business owners for more than 25 years.

Phone: 516-770-5305

Email: GJaffetax@yahoo.com

Contact online: greggjaffetax.com/contact