Selling an Inherited House in New York: Taxes, Liens, and the Step-Up in Basis

Selling a house you inherited in New York should feel like the end of a long process — but it often becomes the point where everything stalls. Estate tax liens block the title. Probate hasn't closed yet. The title company won't insure. And nobody told you that the tax consequences depend heavily on how the property was owned and how quickly you sell.

This is what you need to know before you list.

The Step-Up in Basis: Why Most Heirs Owe Very Little Capital Gains

The most important tax rule for inherited property is the step-up in basis under IRC § 1014. New York fully conforms to this federal provision.

When you inherit real estate, your cost basis is not what the deceased paid for it. Your basis is reset to the fair market value on the date of death. This eliminates capital gains that accumulated during the decedent's lifetime.

Example: A parent bought a house in Westchester in 1985 for $180,000. At their death in 2026, the house is worth $950,000. You inherit it with a basis of $950,000. If you sell it for $960,000 three months later, your taxable gain is $10,000 — not $780,000. If you sell for exactly $950,000, your gain is zero.

The step-up applies regardless of how long the deceased held the property or how much it appreciated. It's one of the largest legal tax benefits in the tax code, and it's automatic for inherited property.

To document the stepped-up basis properly, the estate should obtain a professional appraisal as of the date of death. For real estate, this means a qualified real estate appraiser (not an online estimate). The appraisal establishes the FMV and protects you if the IRS questions the basis years later.

The Joint Ownership Wrinkle

If the deceased owned the property jointly with a surviving spouse, the step-up in basis only applies to the deceased spouse's half.

New York is a common law state, not a community property state. Each spouse owns their share independently. At the first spouse's death, only their 50% interest is stepped up to the current FMV. The surviving spouse's 50% retains its original cost basis.

Practical example: A couple bought a home together in 1992 for $400,000, each contributing $200,000 to the basis. The home is worth $1,600,000 at the first spouse's death in 2026. The deceased spouse's 50% (originally $200,000) is stepped up to $800,000. The surviving spouse's 50% remains at $200,000.

If the surviving spouse sells for $1,600,000, the taxable gain is calculated on their half: $800,000 sale price minus $200,000 original basis = $600,000 gain. The surviving spouse can apply the $250,000 primary residence exclusion (if they qualify), reducing the gain to $350,000.

This is meaningfully worse than if the property had been in a community property state, where 100% of jointly held property gets stepped up at the first spouse's death. It's a real planning consideration for New York couples with significant real estate.

Before You Can Sell: The Estate Tax Lien

New York law imposes an automatic estate tax lien on all real property at the exact moment of the owner's death. You cannot sell the property — and no title company will insure the transaction — until the estate obtains an official Release of Lien from the New York State Department of Taxation and Finance.

The lien release requires filing Form ET-117 along with one of the following:

• Form ET-30: Available if you already have Letters Testamentary or Letters of Administration from the Surrogate's Court, and less than nine months have passed since the date of death
• Form ET-85: Used when the estate is not required to file an estate tax return (the estate is below the $7,350,000 threshold), or if more than nine months have passed, or if no fiduciary has been formally appointed yet; must be notarized
• Form ET-706: Required if the estate is taxable and an estate tax return is being filed

The lien release process typically takes three to five weeks. Plan for this in your closing timeline. Failing to account for it is one of the most common causes of deal collapse on inherited New York real estate.

Probate Is Usually Required

Unlike in some states, there is no simple affidavit procedure to transfer real estate in New York outside of probate. If the property was held in the deceased's sole name, formal Surrogate's Court proceedings are generally required to establish the executor's authority and convey clear title to the heirs.

The only exceptions are property held in a revocable trust (which passes outside probate entirely) or property with joint tenancy with right of survivorship (which passes automatically to the surviving joint owner). A basic tenancy in common — which is how many siblings or non-spouses hold property — does not avoid probate.

The New Transfer-on-Death Deed: A Caution for Recent Transfers

New York enacted a Transfer-on-Death (TOD) deed statute effective July 2024. This allows property owners to designate beneficiaries who receive the real estate automatically at death without probate.

But TOD deeds come with a significant caveat: creditors of the deceased estate have an 18-month window to reach back into the TOD property if the probate estate is insufficient to pay debts. Title insurance companies are acutely aware of this. Many will refuse to issue a standard title policy on a home sold within 18 months of the owner's death if it was transferred by a TOD deed. Getting clean title insurance during that window often requires posting a bond or using a specialty insurer — at additional cost and complexity.

If you inherited through a TOD deed and want to sell quickly, talk to a title attorney before listing. The 18-month window is real and title insurers take it seriously.

New York Transfer Taxes on the Sale

When the estate (or the heir, after title transfer) sells the property, New York and NYC impose transfer taxes. The NYS Real Estate Transfer Tax is $2 per $500 of consideration (0.4%). NYC additionally imposes the NYC Real Property Transfer Tax, ranging from 1% to 1.425% for residential sales and higher for commercial. In NYC, properties over $2 million also trigger the "mansion tax" (1% on purchases over $1M, paid by the buyer).

These are transaction taxes on the sale, not income taxes on the gain. They're paid at closing and reduce your net proceeds.

After the Sale: Reporting the Gain

If you sell for more than your stepped-up basis, the gain is reportable on Schedule D of your federal return and the New York IT-203 or IT-201. If the property was a personal residence you used for two of the last five years, you may qualify for the $250,000 (single) or $500,000 (married) capital gains exclusion on the federal level.

New York does not have a separate capital gains tax rate — gains are taxed at ordinary income rates, which reach 10.9% at the top bracket.

For complex situations — estate tax lien release, co-op transfers, partial interest sales between heirs — see the New York Final Tax & Estate Tax Guide for the full procedural map, including the ET-117 filing process and timing considerations relative to the Surrogate's Court proceedings.

The Practical Sequence for Selling

1. Open Surrogate's Court proceeding and obtain Letters Testamentary (if not already done)
2. Obtain a professional date-of-death appraisal of the property
3. File Form ET-117 with ET-30 or ET-85 to clear the estate tax lien (allow 3-5 weeks)
4. List and contract the property once the lien release letter arrives from Albany
5. At closing, pay NYS and NYC transfer taxes
6. Report the capital gain (stepped-up basis minus sale price) on your return

The step-up in basis means the tax bill for most heirs is far smaller than they anticipated. The process of getting clear title to sell is what actually takes time.

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