Real Estate Tax Planning in New York: 5 Questions Owners Should Ask Every Year

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By Eric Krupnik, CPA · 5 min read

Real estate gives owners more tax planning room than most investments, but the benefits depend on decisions made before the year ends, not after. For New York investors, the stakes are higher: a sale can trigger federal, state, and city income tax plus transfer taxes. These five questions are a good place to start real estate tax planning each year.

1. Are you claiming all the depreciation you are entitled to?

Residential rental property is generally depreciated over 27.5 years and commercial property over 39 years. Land is never depreciated, so the purchase price needs to be split between land and building.

Missed depreciation is costly twice. When you sell, the IRS taxes depreciation that was “allowed or allowable,” so you can owe tax on deductions you never took. The good news is that missed depreciation can usually be caught up in a single year by filing a change in accounting method (Form 3115), without amending old returns.

Is a cost segregation study worth it?

A cost segregation study separates parts of a building, such as fixtures, certain electrical and plumbing work, and land improvements, into 5-, 7-, and 15-year categories that depreciate faster. For property acquired after January 19, 2025, 100% bonus depreciation is available again for those shorter-lived parts, which can create large first-year deductions. A study is not worth it for every property, so the numbers should be checked first, and faster deductions now mean more recapture at sale.

2. Are you planning a sale, and do you know what it will cost?

A sale of New York investment property can trigger several layers of tax:

• Federal long-term capital gains tax, up to 20%
• Depreciation recapture on real property, taxed at up to 25%
• The 3.8% net investment income tax for higher earners
• New York State income tax and, for New York City residents, city income tax
• New York State real estate transfer tax and, in the city, the NYC Real Property Transfer Tax, which are usually paid by the seller

The total is often higher than owners expect. Knowing the number in advance lets you decide whether to sell, wait, defer with a 1031 exchange, or structure the sale as an installment sale.

3. Would a 1031 exchange fit?

A like-kind exchange lets you defer gain by reinvesting in other investment or business real estate. New York follows the federal rules, so the state tax is deferred as well. The deadlines are strict and cannot be extended for ordinary delays: 45 days to identify replacement property and 180 days to close.

• A qualified intermediary must hold the sale proceeds. If you take the money, even briefly, the exchange fails.
• Cash or debt relief you do not reinvest (called “boot”) is taxable.
• Exchanges with family members and other related parties have extra holding rules.

4. Is the property held in the right entity?

LLCs, partnerships, and S corporations each treat income, losses, debt, and liability differently. For most real estate, an LLC taxed as a partnership offers the most flexibility. Appreciated real estate generally does not belong in an S corporation, because taking the property out later can trigger tax on the full gain. The right structure depends on how many owners you have, whether you plan to bring in investors, and whether the property may eventually pass to your family (see our guide to business succession planning on succession planning).

Moving a property into a new entity after the fact can have its own tax cost, and in New York may trigger transfer tax, so it is best decided at purchase.

5. Can you use your rental losses?

Rental losses are generally passive, so they can only offset passive income. The $25,000 allowance for owners who actively participate phases out between $100,000 and $150,000 of modified adjusted gross income, so most high earners do not benefit from it. The main exceptions are:

• Real estate professional status, which generally requires more than 750 hours a year in real estate activities and more than half of your working time
• Short-term rentals with an average guest stay of seven days or less, where you materially participate

Unused losses carry forward and are released when you sell the property in a taxable sale, but they need to be tracked year to year.

Keep the records

Closing statements, improvement receipts, and a clear split between repairs and capital improvements will save money at sale time. The distinction matters: repairs may be deducted now, while improvements are added to your basis and depreciated. If you inherit property, the date-of-death value becomes your new basis, which we explain in our guide to estate and trust tax returns.

If you own or plan to buy real estate in New York, we can walk through these questions with your actual numbers.

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Common questions about real estate taxes in New York

Does New York recognize 1031 exchanges?

Yes. New York follows the federal like-kind exchange rules, so gain deferred federally is generally deferred for New York State and City income tax as well. Transfer taxes may still apply.

What is depreciation recapture on a rental property?

When you sell, the depreciation you claimed (or could have claimed) is taxed at a federal rate of up to 25%, separate from the capital gains rate on the rest of the gain.

When does a cost segregation study make sense?

Usually for larger or recently purchased or renovated properties, where the extra first-year deductions outweigh the cost of the study and the added recapture at sale.

Related reading

• New York Residency Audits: Domicile, the 183-Day Rule, and How to Prepare
• Business Succession Planning in New York: How to Plan the Handoff and Limit the Tax Bill
• Estate and Trust Tax Returns: What New York Executors and Trustees Often Miss

About the author: Eric Krupnik, CPA, advises real estate investors, owners, and developers in Brooklyn and Manhattan on tax planning and compliance. Last reviewed: November 2026.

This article is general information, not tax advice for your specific situation.