How much tax is deferred on a $1 million gain in New York City?

Federal capital gains tax at 20% equals $200,000. New York State tax at 10.9% equals $109,000. NYC city tax at roughly 3.876% equals $38,760. Total: roughly $347,760 deferred. This illustrates why the 1031 is so powerful in NYC.

Does New York charge transfer tax on 1031 exchanges?

New York State charges transfer tax on real estate sales. If you sell property, you owe transfer tax. However, a 1031 exchange is a replacement property acquisition, not a "sale" in the traditional sense. The mechanics can be complex, so consult a New York tax professional to ensure proper structuring and documentation.

What about NYC's 1% transfer tax?

NYC charges an additional 1% transfer tax on property sales within the city. This applies to both the sale of your relinquished property and potentially the purchase of replacement property within NYC. Structure matters to minimize transfer taxes, so work with advisors familiar with NYC transactions.

How does rent-stabilized property affect my 1031 exchange?

If you own rent-stabilized rental property in NYC, the property still qualifies for a 1031 exchange. However, rent-stabilized properties often have lower market values and cap rates due to regulated rents. Factor this into your replacement property strategy. You may exchange out of stabilized properties into unregulated assets or out-of-state properties with better economics.

Can I exchange a NYC brownstone into upstate property?

Yes. The 1031 rules don't care about geography. You can exchange a Manhattan or Brooklyn brownstone into a multifamily property in upstate New York, Buffalo, Rochester, or any other qualifying replacement property. Many NYC investors do this to escape the challenges of managing older residential buildings in the city.

1031 Exchange in New York: Tax Deferral in America's Highest-Tax State

10 min read · By State · Last updated March 2026

Key Takeaways

New York's state income tax reaches 10.9% and NYC's city tax adds 3.876%, combining for roughly 14.876% state and local capital gains tax. A 1031 exchange defers this enormous tax liability, making the strategy particularly powerful for New York investors.

New York's layered tax structure — state income tax, city income tax for NYC residents, transfer taxes at both state and city levels, and a regulatory environment that directly affects property economics — makes 1031 exchanges more consequential here than in any other state. But the value of an exchange in New York depends on understanding which taxes apply to your specific situation and how those taxes shape your replacement property strategy.

Three Distinct Tax Layers

Most states impose one layer of income tax on capital gains. New York can impose three, depending on where you live and where the property is located.

New York State Income Tax

New York State taxes capital gains as ordinary income. There is no preferential long-term capital gains rate at the state level. The top marginal rate is 10.9%, which applies to taxable income above approximately $25 million. However, investors with taxable income in the $1 million to $5 million range already face effective rates of 9.65% to 10.3%. For practical purposes, most real estate investors selling properties with significant gains will pay state tax in the range of 9.65% to 10.9% on the gain.

This rate applies to all New York State residents regardless of where the property is located. It also applies to nonresidents who sell property physically located in New York, because New York sources that gain to the state.

New York City Resident Income Tax

New York City imposes its own income tax on residents. The top city rate is 3.876%, which applies to income above approximately $500,000 for single filers and $1 million for married couples filing jointly.

The city tax is a resident tax. If you live in New York City, you owe city income tax on your capital gains regardless of where the property sits. If you live in Westchester, Long Island, or upstate New York — even if you own property in Manhattan — you generally do not owe city income tax, because the city tax is based on residency, not property location.

This distinction matters. A New York City resident selling a property anywhere in the country faces a combined state-plus-city marginal rate approaching 14.8%. A New York State resident who lives outside the five boroughs faces roughly 10.9% at the state level. The difference — nearly 4 percentage points — translates to $40,000 on a $1 million gain.

Combined Rate for NYC Residents

For a New York City resident in the highest brackets selling investment real estate:

Federal long-term capital gains: 20%
Net Investment Income Tax (NIIT): 3.8%
New York State: ~10.9%
New York City: ~3.876%
Combined: approximately 38.6%

On a $1 million gain, that is roughly $386,000 in taxes. A successful 1031 exchange defers the full amount.

For a New York State resident living outside NYC, the combined rate drops to approximately 34.7%, or roughly $347,000 on the same gain. Still substantial — and still a powerful incentive to exchange.

Transfer Taxes: A Separate Cost Layer

New York imposes transfer taxes on real estate sales that operate independently of income tax and are not deferred by a 1031 exchange. Understanding these costs is important because they affect the net proceeds available for reinvestment.

New York State Real Estate Transfer Tax

The state charges a base transfer tax of $2 per $500 of consideration, which works out to 0.4%. For residential properties sold for $3 million or more, and commercial properties sold for $2 million or more, an additional 0.65% "mansion tax" applies at the state level (for a combined state rate of 1.05% on qualifying transactions). The transfer tax is imposed on the seller.

NYC Real Property Transfer Tax (RPTT)

Within New York City, the city imposes its own transfer tax. For residential properties, the rate is 1.0% on sales up to $500,000 and 1.425% above $500,000. For commercial properties, the rate is 1.425% up to $500,000 and 2.625% above $500,000.

NYC Mansion Tax (Buyer's Tax)

Separately, buyers of residential property in NYC priced at $1 million or more pay a graduated mansion tax ranging from 1.0% to 3.9%.

Interaction with 1031 Exchanges

Transfer taxes apply to the sale of the relinquished property. A 1031 exchange does not eliminate these costs — the sale still happens, and transfer taxes are triggered by the conveyance. However, the income tax deferral from the exchange is far larger in dollar terms. Transfer taxes are a transaction cost to account for, not a reason to avoid exchanging.

How New York's Tax Environment Shapes Exchanger Behavior

The sheer magnitude of New York's combined tax burden creates behavioral patterns that differ from lower-tax states.

Exchanging Out of State

Many New York investors use 1031 exchanges to move capital into states with no income tax — Florida, Texas, Tennessee, Nevada — or into states with lower tax burdens and stronger cash-on-cash returns. The motivation is twofold: defer the New York tax on the current gain and reposition future rental income into a lower-tax environment.

This strategy works, but it does not eliminate New York's future claim. If you are a New York resident and you exchange into Florida property, New York still taxes your worldwide income, including rental income from Florida. The tax benefit comes from the deferral of the capital gain itself. If you later move out of New York, you escape the ongoing income tax, but the gain originated in New York remains New York-source income if you ever recognize it.

Exchanging Within New York

Some investors choose to exchange into other New York properties, particularly when moving from management-intensive assets (older rent-stabilized buildings, small multifamily) into more passive or higher-performing assets (newer construction, commercial net-lease, DSTs). The advantage of staying in-state is simplicity — no multi-state tax filing — though the ongoing tax burden on rental income remains.

Using DSTs

DSTs are particularly popular among New York investors for several reasons. The tax deferral benefit is large enough to justify the DST fee structure. New York investors tired of managing properties — especially in the city's regulatory environment — value the passivity. And DSTs in no-income-tax states allow geographic diversification while continuing to defer the original gain.

Rent Stabilization and 1031 Strategy

New York City and certain surrounding municipalities have extensive rent stabilization laws. These laws cap annual rent increases (typically 1% to 3% per year as set by the Rent Guidelines Board) and restrict an owner's ability to deregulate apartments.

Rent-stabilized properties tend to trade at compressed cap rates relative to market-rate properties because the regulated rents limit income growth. For an investor who acquired a rent-stabilized building decades ago, the gap between the building's current performance and its theoretical market-rate performance can be significant — and the accumulated capital gain can be enormous.

A 1031 exchange allows these investors to reposition. Common strategies include:

Exchanging into market-rate multifamily in a different geography where rents are not regulated
Exchanging into commercial property (retail, industrial, medical office) that is not subject to residential rent regulation
Exchanging into DSTs to eliminate management entirely while maintaining tax deferral

The decision to sell a rent-stabilized building is complex — there are regulatory, tenant-relations, and reputational considerations beyond the tax analysis. But the 1031 exchange makes the financial transition significantly more efficient by deferring what would otherwise be a substantial tax event.

Common New York Exchange Scenarios

Brooklyn Multifamily to Southeast Apartments. An investor sells a 6-unit brownstone in Brooklyn for $3 million, realizing approximately $1.5 million in gain. Rather than paying roughly $580,000 in combined taxes, she exchanges into a 30-unit apartment complex in Charlotte, North Carolina. The replacement property generates higher cash-on-cash returns, requires less hands-on management (professional property management is standard), and sits in a state with a 4.5% income tax rate rather than New York's 10.9%.

Manhattan Commercial to Passive DSTs. A business owner sells a Manhattan office condo for $4 million after 20 years of ownership, realizing $2 million in gain. She exchanges into two DSTs — one in industrial logistics, one in medical office — deferring approximately $770,000 in combined federal, state, and city taxes. She receives monthly distributions and files a single K-1 per DST each year.

Upstate Portfolio Consolidation. An investor who owns three single-family rentals in the Hudson Valley sells all three through coordinated 1031 exchanges and consolidates into a single 12-unit multifamily building in the Albany metro area. The consolidation reduces management burden while maintaining comparable income.

Filing Requirements

New York conforms to federal 1031 treatment. If the exchange qualifies under federal law, the gain is deferred for New York purposes as well. However, New York requires that the exchange be properly documented and reported on your state return. Failure to report a 1031 exchange — even a valid one — can trigger state penalties.

If you exchange into out-of-state property, you will need to track the deferred gain for New York purposes. Unlike California, New York does not require an annual information return (comparable to California's Form 3840) specifically for tracking out-of-state exchange property. However, the gain remains New York-source income, and you must report it when eventually recognized.

Work with a CPA experienced in New York real estate taxation to ensure proper reporting. The cost of professional guidance is modest relative to the tax dollars at stake.

Quantifying the Deferral: A Worked Example

You sell a rental property in Queens for $1.5 million. Your adjusted cost basis is $600,000, producing a $900,000 gain.

Tax Component	Rate	Tax on $900,000 Gain
Federal LTCG	20%	$180,000
NIIT	3.8%	$34,200
New York State	~10.9%	$98,100
New York City (if resident)	~3.876%	$34,884
Total (NYC resident)		$347,184
Total (non-NYC NY resident)		$312,300

A 1031 exchange defers the entire amount. That $312,000 to $347,000 stays invested in your replacement property, compounding alongside the property's appreciation. Over a 10-year hold at 5% annual growth, the deferral benefit alone is worth over $200,000 in additional portfolio value compared to paying taxes upfront.

Getting Started

Quantify your tax exposure. Use our calculator to model your specific gain, tax rates, and deferral benefit.
Decide whether to stay in New York or diversify. Both paths have merit. Staying simplifies taxes. Diversifying can improve returns and reduce regulatory exposure.
Engage a QI and CPA before you list. In New York, the tax complexity and dollar amounts justify professional guidance from the beginning. A qualified intermediary must be in place before the sale closes — not after.
Build your replacement property pipeline early. Whether you are targeting New York properties or out-of-state assets, the 45-day identification deadline is tight. Start evaluating replacement options well before your sale closes.

For New York investors, the 1031 exchange is not a niche strategy — it is one of the most consequential financial decisions available. The combined state and city tax burden makes the deferral benefit larger here than anywhere else in the country.

The Bottom Line

For New York investors, a 1031 exchange is one of the most valuable tax tools available. The state and city tax burden is so substantial that deferring it creates enormous cash flow benefits. Whether you're in NYC or upstate, the deferral advantage is significant.