By Eric Berman, REALTOR® | The Eric Berman Team at Compass
 

TL;DR:

Most Port Washington primary residence sellers don't owe federal capital gains tax because IRC Section 121 exclusion covers up to $250,000 of gain (single filers) or $500,000 (married filing jointly) when specific requirements are met. But Port Washington sub-market matters substantially — long-time Sands Point and Harbor Acres homeowners with substantial appreciation can face capital gains above the exclusion. Federal 2026 long-term capital gains brackets: 0% up to $49,450 taxable income (single) or $98,900 (married filing jointly), 15% up to $545,500 single or $613,700 MFJ, 20% above. Net Investment Income Tax (NIIT) adds 3.8% for high-income taxpayers with MAGI above $200,000 single or $250,000 MFJ. NY State treats capital gains as ordinary income at NY rates up to 10.9% for high earners. NYC residents (Queens) face additional NYC personal income tax up to 3.876%. Cost basis includes original purchase price plus qualifying capital improvements — substantive record-keeping matters critically. Inherited homes receive Section 1014 stepped-up basis to fair market value at date of inheritance. Investment properties can use Section 1031 exchange to defer taxes — not applicable to primary residence. This is general framework only — substantive qualified tax advisor consultation is critical for specific situations. Real estate agent is not a tax advisor.

The Honest Framework Upfront

Capital gains tax questions matter substantially for Port Washington sellers, but the framework is more nuanced than most sellers initially realize. And more importantly: this content is substantive general framework only. Real estate agent is not a tax advisor. Substantive qualified CPA or tax advisor consultation matters critically for specific decisions.

That framing matters because capital gains tax has real financial consequences — the difference between accurate planning and inaccurate assumption can be $10,000, $50,000, or substantially more on higher-value Port Washington properties. Understanding the general framework helps clarify the conversation to have with a qualified tax advisor. It doesn't replace that conversation.

For a quick sense of what a specific Port Washington property might be worth in current condition, the home valuation tool is a low-pressure starting point.

Federal Capital Gains Framework

Federal capital gains tax applies to profit from selling capital assets held for more than one year. On residential real estate, that means the gain (sale price minus cost basis) is subject to long-term capital gains rates rather than ordinary income rates.

Federal 2026 long-term capital gains brackets, per IRS Rev. Proc. 2025-32, work as follows. Long-term capital gains are taxed at 0% up to $49,450 of taxable income for single filers or $98,900 for married couples filing jointly. Between those thresholds and $545,500 (single) or $613,700 (married filing jointly), long-term capital gains are taxed at 15%. Above those thresholds, long-term capital gains are taxed at 20%.

The mechanics matter. Capital gains "stack" on top of ordinary income to determine which rate applies. IRS effectively fills the income space with ordinary income first, then layers long-term capital gains on top. So a Port Washington homeowner with $180,000 in ordinary income and $200,000 in long-term capital gains after Section 121 exclusion has taxable income of approximately $380,000 — landing entirely inside the 15% bracket for the capital gains portion.

Short-term capital gains (assets held one year or less) are taxed at ordinary income rates rather than long-term capital gains rates. On Port Washington residential real estate, short-term gains are unusual — most homeowners hold properties longer than one year — but flippers or short-term investors face substantially higher tax rates.

Net Investment Income Tax (NIIT) adds 3.8% to capital gains for high-income taxpayers. NIIT applies when Modified Adjusted Gross Income (MAGI) exceeds $200,000 for single filers or $250,000 for married filing jointly. For Port Washington sellers at Sands Point, Harbor Acres, and higher-value sub-market price points, NIIT frequently applies and adds substantively to total tax.

Section 121 Primary Residence Exclusion

The most important capital gains framework for Port Washington homeowners is IRC Section 121 primary residence exclusion. This provision excludes up to $250,000 of gain from federal capital gains tax for single filers or $500,000 for married couples filing jointly, when specific requirements are met.

Three tests determine eligibility.

Ownership test: seller must have owned the property for at least 2 of the 5 years ending on the sale date. This is a cumulative test — not necessarily continuous.

Use test: seller must have used the property as primary residence for at least 2 of the 5 years ending on the sale date. Vacation homes, rental properties, and second homes don't qualify unless the seller genuinely used them as primary residence for the required period.

Frequency limitation: seller can claim the Section 121 exclusion only once every 2 years. Repeat exclusions require the 2-year waiting period.

The tests apply per taxpayer for the ownership and use portions. In married-filing-jointly situations, only one spouse needs to meet ownership test, but both spouses must meet use test to claim the full $500,000 exclusion.

Partial exclusion for special circumstances applies when a seller can't fully meet the 2-of-5-year requirements due to job change (new job location at least 50 miles farther from previous residence than current residence), health circumstances (medical care requiring move), or unforeseen circumstances (divorce, death, multiple births from one pregnancy, involuntary conversion, natural disaster, other specific events per IRS regulations). Partial exclusion is calculated based on qualifying period relative to 2-year requirement — a seller who lived in property 1 year of the 2-year use test due to qualifying circumstance can claim 50% of the applicable exclusion ($125,000 single / $250,000 MFJ).

Cost Basis — What Actually Increases It

Cost basis matters substantially for capital gains calculation. Substantive record-keeping over the ownership period is critical.

Cost basis includes:

Original purchase price of the property.

Closing costs paid at purchase — attorney fees, title insurance, recording fees, survey costs, transfer taxes paid by buyer.

Capital improvements that add value, prolong useful life, or adapt to new uses. Examples include additions, new roof, new HVAC system, kitchen or bathroom remodels, new flooring throughout, structural improvements, landscape improvements, electrical upgrades, plumbing upgrades. Key concept: the improvement must have a useful life extending beyond one year and add value to the property.

Cost basis does NOT include:

Routine maintenance and repairs. Painting existing rooms, fixing broken windows, patching leaks, repairing existing systems. These are deductible against rental income when applicable but don't increase cost basis for capital gains purposes.

Selling costs at eventual sale (though these separately reduce capital gain).

Documentation matters critically. IRS requires substantive documentation for cost basis adjustments — receipts, contractor invoices, permits, before-and-after photographs where appropriate. Long-time Port Washington homeowners who don't maintain substantive records lose meaningful cost basis benefit.

Special situations affecting cost basis:

Inherited property receives IRC Section 1014 stepped-up basis to fair market value at date of inheritance. This often eliminates most or all capital gains for beneficiaries who sell shortly after inheritance.

Property received via gift retains the giver's basis (carryover basis) rather than stepped-up basis.

Property converted from rental to personal use, or from personal use to rental, involves specific IRS treatment requiring substantive tax advisor coordination.

NY State Capital Gains Treatment

NY State treatment of capital gains differs substantially from federal treatment and matters critically for Long Island sellers.

NY State does not have preferential long-term capital gains rates. Capital gains are treated as ordinary income at NY State income tax rates. For 2026, NY State income tax rates range from 4% for lowest income to 10.9% for highest income.

High-income Port Washington sellers face NY State tax at 10.9% on capital gains portions above certain thresholds. This applies on top of federal capital gains tax and any applicable NIIT — total tax burden on high-income Port Washington capital gains can approach 32-34% (federal 20% + NIIT 3.8% + NY State 10.9%).

Section 121 primary residence exclusion does apply for NY State purposes — NY State conforms to federal treatment on this exclusion.

Cost basis adjustments apply for NY State purposes similar to federal treatment.

Nonresident sellers face specific NY State treatment — NY requires nonresident sellers to file IT-2663 estimated tax at closing (typically 8.82% of net gain, refundable if actual tax liability lower). This is not a separate tax but an estimated payment against the seller's NY State income tax liability on the sale.

NYC Personal Income Tax — For Queens Residents

For Long Island sellers who reside within NYC (the Queens portion of the Long Island market including Fresh Meadows, Bayside, Jamaica Estates, Douglaston, Little Neck, Whitestone), NYC personal income tax adds an additional layer.

NYC personal income tax rates range from approximately 3.078% to 3.876% for high-income NYC residents. This applies on top of federal capital gains tax, NIIT (if applicable), and NY State income tax.

For a Queens homeowner selling with substantial capital gains, total tax burden can approach 35-37% (federal 20% + NIIT 3.8% + NY State 10.9% + NYC 3.876%).

Port Washington itself is in Nassau County, not NYC — Port Washington homeowners don't face NYC personal income tax on their capital gains. But Port Washington sellers who currently reside in NYC (some property owners live in Manhattan and rent out or use Port Washington property differently) should coordinate substantively with tax advisor.

Section 1031 Exchange — Investment Property Only

Section 1031 exchange allows deferral (not elimination) of capital gains tax when investment property is exchanged for other investment property. This provision does NOT apply to primary residence.

Section 1031 requirements include: property being exchanged must be held for investment or business purposes, replacement property must be identified within 45 days of sale, replacement property must be acquired within 180 days of sale, replacement property must be "like-kind" to relinquished property (broadly defined for real estate — most real property is like-kind to other real property).

Port Washington investors with rental properties can use Section 1031 exchange to defer capital gains when transitioning between investment properties. Substantive coordination with qualified intermediary, tax advisor, and real estate attorney matters critically for Section 1031 execution.

Primary residence sellers cannot use Section 1031. Section 121 exclusion is the appropriate framework for primary residence sales.

Port Washington Sub-Market Capital Gains Dynamics

Port Washington sub-market matters substantially for capital gains framework.

Sands Point ($3M-$15M+) long-time homeowners often face substantial capital gains exceeding Section 121 exclusion. A homeowner who purchased in 1995 for $1.2M and sells today for $6M has gross gain of $4.8M — even after $500K exclusion, $4.3M remains taxable. Federal 20% + NIIT 3.8% + NY State 10.9% + cost basis adjustments can produce total tax exposure of $1.4M-$1.5M on the retained gain. Substantive tax planning is critical.

Harbor Acres ($1.2M-$3M) similar dynamics for long-time homeowners. Substantial appreciation over 20-30 year holds frequently produces capital gains above Section 121 exclusion.

Port Washington North, Baxter Estates, Beacon Hill, and Flower Hill ($900K-$2.5M) show more variable capital gains dynamics. Long-time homeowners often face capital gains above exclusion; more recent buyers typically remain within exclusion.

Manorhaven ($700K-$1.4M) most homeowners with primary residence status remain within Section 121 exclusion. Long-time homeowners with substantial appreciation should still verify with tax advisor.

For long-time Port Washington homeowners of any sub-market, cost basis documentation from years or decades of ownership matters critically. Original purchase closing statements, capital improvement receipts, and permit history all affect the calculation.

Common Port Washington Capital Gains Mistakes

Some patterns consistently produce worse outcomes than the situation requires.

Not maintaining substantive cost basis records over the ownership period. Long-time Port Washington homeowners who don't have receipts for capital improvements often lose meaningful cost basis benefit, producing higher taxable gain than necessary.

Assuming Section 121 exclusion applies automatically without verifying ownership and use tests. Sellers with unusual ownership patterns — inherited-then-lived-in properties, converted rental properties, LLC-held properties — may not qualify.

Not recognizing NIIT applies at higher income levels. Federal capital gains rate of 15% plus NIIT 3.8% equals 18.8% effective federal rate — meaningful math on higher-value sales.

Not accounting for NY State treatment of capital gains as ordinary income. Sellers focused only on federal treatment can face NY State tax surprise at 10.9% on high-income capital gains portion.

Assuming Section 1031 exchange applies to primary residence. It doesn't. Primary residence uses Section 121; investment property uses Section 1031.

Not planning timing of sale relative to other income. Long-term capital gains rate depends on total taxable income. A seller with meaningful ability to time sale can shift into lower capital gains bracket.

Not consulting qualified CPA or tax advisor early in the sale process. Capital gains framework has substantial implications; substantive tax advisor coordination 60-90 days before sale enables meaningful planning.

Confusing capital gains tax with real estate transfer tax. These are separate frameworks — NY State Transfer Tax ($4 per $1,000 of sale price paid by seller) is unrelated to capital gains tax on the gain from the sale.

A Recent Port Washington Capital Gains Story

A Port Washington North homeowner walked through this substantive framework recently on her colonial worth approximately $1,285,000. Original 1998 purchase price of $385,000. Married filing jointly.

Substantive cost basis reconstruction with tax advisor. Original purchase price $385,000. Closing costs at purchase $8,500. Capital improvements over 27 years documented from receipts and permit records — 2002 kitchen remodel $32,000, 2008 primary bath remodel $18,500, 2011 new roof $16,800, 2014 HVAC system replacement $12,300, 2019 hardwood floors refinished throughout $8,200, 2020 basement finishing $28,500, various smaller improvements $22,000. Total documented cost basis $531,800.

Sale price $1,298,000. Selling costs $73,167 (5.6%). Amount realized $1,224,833.

Capital gain calculation: $1,224,833 amount realized minus $531,800 cost basis = $693,033 gross capital gain.

Section 121 exclusion (married filing jointly): $500,000. Taxable gain after exclusion: $193,033.

Their federal ordinary income for the year was approximately $220,000. Adding $193,033 taxable capital gain produces total taxable income around $413,000 — landing entirely within the 15% long-term capital gains bracket (below the $613,700 MFJ threshold for 20% rate).

Federal capital gains tax: $193,033 × 15% = $28,955.

NIIT applies (MAGI exceeds $250K MFJ threshold): $193,033 × 3.8% = $7,335.

NY State treats capital gains as ordinary income. NY State rate at their income level approximately 6.85%: $193,033 × 6.85% = $13,223.

Total tax on the taxable capital gains portion: $28,955 + $7,335 + $13,223 = $49,513.

Comparison to hypothetical scenario without substantive cost basis reconstruction. Without documented improvements ($531,800 basis vs. $393,500 basis from purchase price and closing costs alone), taxable gain after exclusion would have been $331,333 instead of $193,033. Additional tax on the $138,300 difference at 25.65% (15% federal + 3.8% NIIT + 6.85% NY State) = $35,474 additional tax. Substantive cost basis documentation saved approximately $35,474 in taxes.

Her situation illustrates how substantive cost basis reconstruction with qualified tax advisor coordination produces meaningfully better outcomes than reactive assumption. The tax advisor engagement cost her approximately $2,500 in fees and produced $35,474 in tax savings.

Where to Start

For Port Washington homeowners thinking about capital gains implications of a potential sale, the honest starting point is substantive qualified tax advisor coordination early.

First: qualified CPA or tax advisor engagement 60-90 days before target listing date. Substantive tax planning enables meaningful decisions.

Second: substantive cost basis documentation reconstruction. Original purchase records, closing statements, capital improvement receipts, permit records, contractor invoices — everything that supports basis adjustments.

Third: honest assessment of Section 121 exclusion eligibility. Ownership test (2 of 5 years owned), use test (2 of 5 years as primary residence), frequency limitation (once every 2 years). Special circumstances for partial exclusion where applicable.

Fourth: understanding of specific sub-market appreciation implications. The home valuation tool provides a starting sense of current market value.

Fifth: NY State treatment framework understanding. Capital gains as ordinary income at NY rates matters substantially at higher income levels.

Sixth: coordination with real estate attorney (mandatory in NY) and listing agent with substantive Port Washington sub-market expertise. NY attorney handles closing coordination regardless of tax framework decisions.

Seventh: timing considerations relative to other income when meaningful flexibility exists.

For related context: the Long Island legal requirements guide covers the broader legal framework including NY attorney state and NY State Transfer Tax (distinct from capital gains tax). The Long Island closing costs guide covers cost framework at closing. The Long Island inherited home guide covers Section 1014 stepped-up basis in more detail.

The honest bottom line: most Port Washington primary residence sellers don't owe federal capital gains tax because Section 121 exclusion covers up to $250K single / $500K MFJ. Long-time Sands Point and Harbor Acres homeowners with substantial appreciation frequently face capital gains above exclusion, with federal 20% plus NIIT 3.8% plus NY State up to 10.9% producing total tax exposure that can approach $1.4M-$1.5M on multi-million-dollar gains. Substantive cost basis documentation over ownership period matters critically. Section 121 requires substantive ownership test (2 of 5 years), use test (2 of 5 years as primary residence), and frequency limitation (once every 2 years) compliance. Partial exclusion available for job change, health, unforeseen circumstances. Inherited property receives Section 1014 stepped-up basis. Investment properties can use Section 1031 exchange for deferral (not primary residence). This is substantive general framework only. Real estate agent is not a tax advisor. Substantive qualified CPA or tax advisor consultation matters critically for specific decisions.

Note: This blog post covers general framework. This is not tax advice. Individual circumstances vary substantially. Consult qualified CPA or tax advisor for advice specific to your situation. Tax figures cited are 2026 federal (per IRS Rev. Proc. 2025-32), NY State, and NYC frameworks and are subject to change. Long-term capital gains bracket thresholds adjust annually for inflation.

FAQs

Do I have to pay capital gains tax when selling my Port Washington home?

Maybe. Most primary residence sellers don't owe federal capital gains tax because IRC Section 121 exclusion covers up to $250,000 of gain (single filers) or $500,000 (married filing jointly) when specific requirements are met. Ownership test requires 2 of 5 years ownership; use test requires 2 of 5 years as primary residence. Long-time Port Washington homeowners at Sands Point, Harbor Acres, and higher-value sub-markets with substantial appreciation frequently face capital gains above exclusion. Federal 2026 long-term capital gains rates are 0% up to $49,450 taxable income (single) or $98,900 (MFJ), 15% up to $545,500 or $613,700 MFJ, 20% above. Net Investment Income Tax adds 3.8% for high-income taxpayers (MAGI above $200K single / $250K MFJ). NY State treats capital gains as ordinary income up to 10.9%. This is general framework only — qualified CPA or tax advisor consultation matters critically for specific decisions.

What is Section 121 and how does it work?

IRC Section 121 is the federal tax provision excluding up to $250,000 of gain from federal capital gains tax for single filers or $500,000 for married couples filing jointly when specific requirements are met. Three tests apply. Ownership test: seller owned property for at least 2 of 5 years ending on sale date (cumulative, not necessarily continuous). Use test: seller used property as primary residence for at least 2 of 5 years ending on sale date (vacation homes, rental properties, second homes don't qualify unless genuinely used as primary residence for required period). Frequency limitation: exclusion can be claimed only once every 2 years. In married-filing-jointly situations, only one spouse needs to meet ownership test but both must meet use test for full $500,000 exclusion. Partial exclusion available for job change (50+ miles farther from previous residence), health circumstances, or unforeseen circumstances (divorce, death, natural disaster, other specific IRS events).

What increases my cost basis in the property?

Original purchase price, closing costs at purchase (attorney fees, title insurance, recording fees, survey costs, transfer taxes paid by buyer), and capital improvements over ownership period. Capital improvements are additions or upgrades that add value, prolong useful life, or adapt property to new uses — additions, new roof, new HVAC system, kitchen or bathroom remodels, new flooring throughout, structural improvements, landscape improvements, electrical upgrades, plumbing upgrades. Useful life must extend beyond one year. Routine maintenance and repairs don't increase basis (painting existing rooms, fixing broken windows, patching leaks, repairing existing systems). Documentation matters critically — receipts, contractor invoices, permits, before-and-after photographs where appropriate. Long-time Port Washington homeowners who maintain substantive records often reduce taxable gain meaningfully compared to those who don't.

What are the 2026 federal capital gains tax brackets?

Per IRS Rev. Proc. 2025-32, 2026 federal long-term capital gains rates are: 0% for taxable income up to $49,450 (single) or $98,900 (married filing jointly); 15% for taxable income up to $545,500 (single) or $613,700 (married filing jointly); 20% above those thresholds. Capital gains stack on top of ordinary income — IRS effectively fills the income space with ordinary income first, then layers long-term capital gains on top. Short-term capital gains (assets held one year or less) are taxed at ordinary income rates rather than long-term rates. Net Investment Income Tax (NIIT) adds 3.8% for high-income taxpayers with Modified Adjusted Gross Income above $200,000 single / $250,000 married filing jointly. NY State treats capital gains as ordinary income at NY rates up to 10.9% for high earners. NYC residents (Queens portion of Long Island market) face additional NYC personal income tax up to 3.876%.

What about inherited homes in Port Washington?

Inherited property receives IRC Section 1014 stepped-up basis to fair market value at date of inheritance. This often eliminates most or all capital gains for beneficiaries who sell shortly after inheritance. Example: property purchased by parents in 1985 for $185,000, worth $1,285,000 at date of parent's inheritance. Beneficiary's basis is $1,285,000 (stepped up), not $185,000 (original purchase). Sale shortly after inheritance produces minimal capital gains. Long-time hold after inheritance produces capital gains only on appreciation from date of inheritance forward. Property received via gift (not inheritance) retains giver's original basis (carryover basis) rather than stepped-up basis. Estate tax considerations may apply for higher-value estates — substantive estate attorney and tax advisor coordination matters. This is general framework only — qualified CPA or tax advisor consultation matters critically for specific inherited property decisions.

By Eric Berman, REALTOR® | The Eric Berman Team at Compass

Eric Berman | Long Island & Queens Associate Broker | Compass
1468 Northern Blvd, Manhasset, NY 11030
(917) 225-8596 | eric@ericbermanre.com | theericbermanteam.com