By Eric Berman, REALTOR® | The Eric Berman Team at Compass
TL;DR:
The most common mistake is calculating gain as sale price minus purchase price. It isn't. Gain is the amount realized — sale price less selling costs — minus your adjusted basis, which is what you paid plus every capital improvement across your ownership. On a Long Island home held for decades, those improvement records routinely change a six-figure tax outcome, and they're usually in a basement about to be cleared. The exclusion covers $250,000 single and $500,000 filing jointly, fixed since 1997 and frequently exceeded here.
The Arithmetic Most Sellers Get Wrong
Start here, because nearly every other decision follows from it.
Gain is not sale price minus purchase price. The calculation has two adjustments, and both work in the seller's favor.
The amount realized is the sale price less selling costs — commission, transfer taxes, attorney fees, and other expenses of sale. That's the top of the equation, and it's lower than the contract price.
The adjusted basis is what you paid plus every capital improvement made across your ownership. A kitchen, a roof, an addition, replacement windows, central air, a finished basement. That's the bottom of the equation, and it's higher than the purchase price.
Gain is the difference between those two figures, not between the two prices.
A worked version. A home purchased for $500,000 and sold for $900,000 does not produce a $400,000 gain. Subtract roughly $70,000 in selling costs and the amount realized is about $830,000. Add $150,000 in documented capital improvements and the adjusted basis is $650,000. The gain is about $180,000 — less than half the naive figure.
A note on terminology, because it's commonly stated wrong. Selling expenses and capital improvements are not deductions. They don't reduce income on your return; they change the two numbers used to compute gain. The effect is similar and the mechanism is different, and the documentation rules differ too.
The Exclusion, and Why Long Island Exceeds It
Federal law excludes gain on a primary residence — $250,000 for a single filer, $500,000 filing jointly — where the ownership and use tests are met.
The tests are separate. Ownership requires owning the home for at least two of the five years before the sale. Use requires it having been your principal residence for at least two of those five years. They don't have to be the same two years.
Those amounts have been fixed since 1997 and don't adjust for inflation. That's why this matters more here than in most markets: a Nassau or Suffolk home bought in the seventies or eighties and sold today frequently produces gain well past the joint exclusion.
Two provisions worth raising with a CPA, both of which help and neither of which is widely known.
A surviving spouse may be able to claim the full joint exclusion for a limited period following a spouse's death, and the property may also have received a partial basis step-up at that time. Both have timing components.
An owner who becomes physically or mentally incapable of self-care may count time in a licensed care facility toward the use requirement, provided they owned and used the home as a principal residence for at least one of the preceding five years. That can preserve the exclusion for a household selling after a period in care.
Amounts above the exclusion are taxed federally, taxed again by New York as ordinary income, and may attract an additional federal surtax depending on income.
Find the Records Before You Clear the House
This is the highest-return task available and it costs a weekend.
Capital improvements add to basis. Receipts, contracts, and permits for a kitchen, a roof, an addition, windows, HVAC, a finished basement, or structural work. Forty years of them can be worth six figures against the gain.
Routine repairs generally don't. Fixing a leak, repainting, servicing a boiler — those maintain the property rather than improving it. The distinction matters and it's a CPA question at the margins.
The sequencing problem is the real one. Sellers clear the house to prepare for listing, and the paperwork goes out with everything else. Find the records first. That instruction appears in the practical sequence for downsizing for exactly this reason.
Also keep: the closing statement from your purchase, and the settlement statement from the sale.
What You'll Actually Pay at Closing
Separate from income tax, and simpler.
New York State Transfer Tax at four dollars per thousand of the sale price — 0.4 percent — paid by the seller and filed on Form TP-584. On a $900,000 sale that's $3,600.
Queens sellers add the New York City Real Property Transfer Tax, roughly 1.425 percent at or above $500,000, filed separately on Form NYC-RPT. That's the largest cost distinction within this market — about $12,800 more on a $900,000 sale than a Nassau seller pays. The full closing costs breakdown covers every line.
The Mansion Tax is the buyer's, at one percent on sales above one million dollars. It isn't a seller cost — but it's cash the buyer surrenders at closing, which constrains what they can offer, so it belongs in a seller's thinking.
Property tax adjustments settle at closing and can run in either direction depending on the billing cycle.
Recording and title charges apply. Note that Suffolk's Peconic Bay Community Preservation Fund transfer tax is buyer-paid and applies only in the East End towns — it isn't a general Nassau or Suffolk seller cost, and it's frequently described as one.
If You've Left New York
A nonresident seller owes an estimated payment at closing of 8.82 percent of net gain, filed on Form IT-2663 and submitted with the deed.
It isn't an additional tax. It's a prepayment against actual New York State income tax liability, refunded when the return is filed if the real figure comes in lower.
What it does is reduce the wire. Sellers who have established residency elsewhere and already committed those proceeds to a purchase get caught short at closing. Raise it with a CPA before setting a closing date rather than discovering it on a settlement statement.
Investment and Inherited Property
Two situations that work differently.
A rental or investment property triggers depreciation recapture — depreciation claimed, or deemed claimed whether taken or not, is recaptured at a maximum federal rate of 25 percent on unrecaptured Section 1250 gain. On a long-held property that's substantial. The primary-residence exclusion generally doesn't apply, or applies only partially where the owner occupied a unit. A 1031 exchange can defer gain into another investment property, requiring identification within 45 days, closing within 180, and a qualified intermediary — arranged before closing, not after. The full treatment of selling a multi-family property covers it.
An inherited property generally receives a stepped-up basis to fair market value as of the date of death, which for a long-held home usually eliminates most of the gain. A home given during the owner's lifetime does not — the children take the parent's original basis, which is the trap families walk into with good intentions. The walkthrough of an inherited house sale covers the sequence, and property held in trust follows the trust rules, which vary by instrument.
A Worked Example
Consider a composite case — a Nassau County couple who bought in 1983 for $92,000 and sold at $1,140,000.
Their initial arithmetic produced a gain of roughly $1,048,000 and real alarm.
The actual calculation ran differently. Selling costs of about $91,000 brought the amount realized to $1,049,000. Their daughter spent a weekend in the basement and assembled receipts for a 1996 kitchen, a 2004 roof, a rear addition, replacement windows, and central air — roughly $215,000 in documented capital improvements. Adjusted basis became about $307,000.
Gain: roughly $742,000. Against the $500,000 joint exclusion, about $242,000 was taxable — rather than the $548,000 that would have been taxable without the records.
The weekend in the basement was worth more than anything else in the transaction.
Where to Start
Find the improvement records before clearing anything. Locate the closing statement from your purchase. Talk to a CPA about the gain, the exclusion, and whether the surviving-spouse or incapacity provisions apply. If you've left New York, raise IT-2663 before a closing date is set. If the property was inherited or held in trust, talk to an estate attorney and a CPA together before deciding anything.
Then build the net proceeds model. A quiet look at current value is a starting point, and the full breakdown of what a sale costs covers the rest.
The Honest Bottom Line
Most of the tax picture is arithmetic, and most sellers do the arithmetic wrong in the same direction — they subtract the purchase price from the sale price and frighten themselves.
The real calculation subtracts selling costs from the sale price and adds every capital improvement to what they paid. On a home held for decades, that difference is routinely six figures, and the evidence for it is sitting in a filing cabinet that's about to be emptied.
Eric is a REALTOR®, not a CPA, and everything on this page belongs with one. What a seller can do without any professional help is find the receipts first. For anyone working through the net proceeds side, with no pressure attached, that conversation is available whenever the timing suits.
This is general information, not tax or legal advice. Exclusion eligibility, basis calculation, depreciation recapture, exchange requirements, and estate treatment all turn on specific facts and change over time. Consult a licensed CPA and, where an estate or trust is involved, an estate attorney.
FAQs
How is capital gain calculated when selling a home?
Not as sale price minus purchase price, which is the most common error. Gain is the amount realized — sale price less selling costs like commission, transfer taxes, and attorney fees — minus your adjusted basis, which is what you paid plus every capital improvement across your ownership. Both adjustments favor the seller. A home bought at $500,000 and sold at $900,000 doesn't produce a $400,000 gain: after roughly $70,000 in selling costs and $150,000 in documented improvements, it's closer to $180,000.
Are commissions and improvements tax deductions?
No, and the distinction matters. Selling expenses reduce the amount realized; capital improvements increase your basis. Both reduce taxable gain, but neither is a deduction against income on your return. They also follow different documentation rules — selling costs appear on your settlement statement, while improvements require receipts and contracts you have to keep yourself. Routine repairs generally don't count as improvements, which is a distinction worth raising with a CPA at the margins.
How much gain is excluded when selling a primary residence?
$250,000 for a single filer and $500,000 filing jointly, where the ownership and use tests are met — owning the home at least two of the five years before sale, and using it as a principal residence at least two of those five, not necessarily the same two. Those amounts have been fixed since 1997 and don't adjust for inflation, which is why a Long Island home bought decades ago frequently exceeds them. Two provisions worth asking a CPA about: a surviving spouse may claim the full joint exclusion for a limited period, and time in a licensed care facility may count toward the use test for an owner incapable of self-care.
What taxes does a Long Island seller pay at closing?
New York State Transfer Tax at four dollars per thousand — 0.4 percent — filed on Form TP-584. Queens sellers add the New York City Real Property Transfer Tax at roughly 1.425 percent at or above $500,000, filed separately, which is about $12,800 more on a $900,000 sale than a Nassau seller pays. The Mansion Tax above one million is the buyer's, not the seller's. Suffolk's Peconic Bay transfer tax is buyer-paid and applies only in the East End towns — it's frequently misdescribed as a general seller cost.
What if I've already moved out of New York?
You'll owe an estimated payment at closing of 8.82 percent of net gain, filed on Form IT-2663 and submitted with the deed. It isn't an additional tax — it's a prepayment against your actual New York State income tax liability, refunded when you file if the real number comes in lower. The practical problem is timing: it reduces the amount wired at closing, which catches sellers who have already committed those proceeds to a purchase elsewhere. Raise it with a CPA before a closing date is set.
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
