Selling a 2-to-4 family you have rented out for 30 years triggers depreciation recapture taxed at up to 25% plus capital gains tax, while a 1031 exchange defers that tax if you identify a replacement property within 45 days and close within 180. Holding until death can erase the gain for heirs through the IRC 1014 step-up in basis.
The IRS depreciates residential rental buildings over 27.5 years, so an owner who has rented out part of a 2-to-4 family for 30 years has usually written off the full cost of the rented share of the structure, and when the building sells, the gain tied to that depreciation is taxed at a maximum rate of 25%. Selling means paying it. Exchanging means deferring it. Holding until death, under the current federal rules, can erase it for the next generation.
Across three full market cycles in New York City real estate, I have sat at a lot of kitchen tables with owners of two-, three-, and four-family houses in Brooklyn, Queens, and the Bronx, and the question is almost always framed as "is now a good time to sell." The better question is which of three exits fits the building, the owner, and the family.
To run your own numbers as you read, open the should-I-sell tool and switch it to 2-to-4 family.
Step one: the rent roll math, done honestly
A buyer underwrites a 2-to-4 family from the rent roll down, whether or not they plan to live in it. Three terms carry the calculation:
- Effective gross income (EGI): the annual rent roll minus an allowance for vacancy and uncollected rent.
- Operating expenses: real estate taxes, insurance, water and sewer, heat and utilities the owner pays, routine repairs, and management, even if you do it yourself.
- Net operating income (NOI): EGI minus operating expenses. Mortgage payments are not an operating expense, which is why a building with no mortgage can feel more profitable than it is.
Here is an example with round numbers. These are illustrative inputs, not a market figure for any neighborhood.
| Example 3-family (illustrative) | Annual |
|---|---|
| Rent roll: say $9,000 a month across three units | $108,000 |
| Less vacancy and uncollected rent, say 5% | ($5,400) |
| Effective gross income | $102,600 |
| Less operating expenses, say taxes, insurance, water, heat, repairs, management | ($32,600) |
| Net operating income | $70,000 |
Now the honest test. Divide NOI by what you believe the building is worth today, not by what you paid for it in the 1990s. Measured against today's value, which is the money you could have in hand if you sold, the picture is often much thinner.
In the example, if you believe the building is worth $1,750,000, the $70,000 NOI is a 4.0% return on that value. If you believe it is worth $1,150,000, the same NOI is about 6.1%. A rule of thumb I use, and it is a rule of thumb, not a market rate: under about 4% on your own number, a buyer is paying you for the price of the building more than for its income, and holding mostly means carrying a thin return on a large amount of equity. Above about 6%, the income is pulling its weight, and exchanging or holding deserves a serious look.
Step two: deferred maintenance and open violations are a discount
Thirty years of ownership usually means some deferred work: roof, boiler, windows, facade, and sometimes open violations on the city's records. The city's Department of Housing Preservation and Development (HPD) inspects residential buildings and issues housing code violations, and the Department of Buildings (DOB) issues its own. Both are public records, and a buyer's attorney and inspector will pull them.
Whatever they find, they price in, and they price it the way a cautious buyer would: with a margin for the unknown on top of the repair itself. That is why clearing what can reasonably be cleared before listing often costs less than the discount a buyer will ask for the same item. Either way, you want to know what is on the record before the buyer does.
You can look up open HPD and DOB items on any address with the building check lookup, and then see what a sale leaves you after closing costs and payoffs with the seller net proceeds calculator.
If any unit is rent-stabilized, expect the buyer to ask for the building's rent registration history. New York's Division of Housing and Community Renewal (DHCR) requires annual rent registration for rent regulated buildings, and a buyer will underwrite a stabilized unit at its registered legal rent, so gaps or errors in those filings become part of the negotiation.
Put your own rent roll, expenses, and value into the tool. Switch it to 2-to-4 family.
Run the Should I Sell ToolStep three: the tax on selling after 30 years
A sale after three decades usually stacks several layers of tax on the same gain. Your accountant runs the exact figures. The layers are these:
- Depreciation recapture on the rented units. The part of the gain that comes from depreciation on real property is called unrecaptured section 1250 gain, and IRS Topic 409 states it is taxed at a maximum 25% rate. IRS Publication 544 explains how it is figured.
- Long-term capital gains on the rest. Per IRS Topic 409, most net capital gain for most individuals is taxed at no more than 15%, with a 0% rate at lower incomes and a 20% rate above the 15% thresholds.
- The 3.8% net investment income tax, where it applies. IRS Topic 559 applies it to the lesser of net investment income or modified adjusted gross income above $250,000 for married couples filing jointly and $200,000 for single filers. One large gain can push an owner over that line in the year of sale.
- New York State and New York City income tax. The gain is income for New York State purposes, and New York City residents owe the city's personal income tax on top of the state's. Your accountant will apply the current rates.
If you live in one of the units, part of the gain may be excluded. IRC section 121 lets an owner exclude up to $250,000 of gain on a main home, $500,000 for most married couples filing jointly, if they owned and lived in it for at least 24 months of the five years before the sale. IRS Publication 523 is clear that when part of a property separate from your dwelling unit was used for rental, only the gain allocable to your residential portion can be excluded, and the exclusion does not cover depreciation. In a 2-to-4 family, that means the gain gets split: your own unit may qualify, the rented units do not. The NYC capital gains guide covers the exclusion in more detail.
An illustration, again with labeled round numbers: say the depreciation taken on the rented units over the years totals $120,000. At the 25% maximum, that slice alone could cost up to $30,000 in federal tax before the capital gains layer, the 3.8%, and the state and city tax are added. Your records and your bracket set the real figure.
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The exchange path: IRC 1031
A like-kind exchange under IRC section 1031 lets you sell the building and buy other real property held for investment or business use without recognizing the gain now. The rules in IRS Publication 544 are strict:
- You must identify the replacement property in writing within 45 days of transferring the building you give up.
- You must receive the replacement property within 180 days of that transfer, or by the due date of your return for that year, including extensions, if that comes first.
- The sale proceeds go to a qualified intermediary, not to you. Touching the money can break the exchange.
- Since 2018, only real property qualifies, and it must be held for investment or business use, not primarily for sale.
- Your own unit does not qualify. Publication 544 excludes real property used for personal purposes, such as your home. In an owner-occupied 2-to-4 family, only the rental portion can go into the exchange, and cash you take out is generally taxable.
An exchange defers the tax. It does not erase it: the old gain carries into the new property's basis. The 1031 guide for NYC sellers covers the timeline on a New York closing.
The hold path: the step-up at death
Some owners hold for a reason that has nothing to do with the rent. Under IRC section 1014, property acquired from a decedent generally takes a basis equal to its fair market value on the date of death. That resets the clock: the gain built up over the owner's lifetime, the depreciation portion included, is not taxed to heirs who sell at that value. For a building bought decades ago, that can be the single largest number in the whole plan.
The trade-off is everything else about holding: the management, the repairs, the thin return on equity if the cap rate on today's value is low, and a building that heirs may then need to sell, split, or run themselves. How the building passes also matters. A building given to family during life generally keeps the giver's original basis instead of a step-up (IRS Publication 551), which is covered in selling a property transferred for $0. Estate tax is a separate question for your attorney.
The three exits side by side
| Sell | Hold | 1031 exchange | |
|---|---|---|---|
| Cash now | Yes, net of tax and closing costs | Only the income, or a cash-out refinance | Little or none; cash taken out is generally taxable |
| Tax now | Recapture up to 25%, capital gains, 3.8% where it applies, state and city; section 121 may cover your own unit | None on the gain; income tax on the rents continues | Deferred on the rental portion if every rule is met; your own unit is outside the exchange |
| Management burden | Ends at closing | Continues for as long as you own it | Continues, but can move to a property that asks less of you |
| What heirs get | Whatever cash and investments remain | The building, with basis stepped up to value at death under IRC 1014 | The replacement property, which can also receive a step-up at death |
The order I suggest
First, a value opinion on the building as it stands. Second, your accountant's estimate of the tax on a sale at that value, with your depreciation records. Third, the cap rate on your own number. With those three on one page, the choice usually gets clearer.
Own more than one building? The order you sell them in changes the tax picture: see selling multiple NYC buildings: as a package or one at a time.
Frequently Asked Questions
How much tax do I pay selling a rental building I have owned for 30 years?
Several layers stack on the same gain. Depreciation recapture on the rented units, called unrecaptured section 1250 gain, is taxed at up to 25%. Most of the remaining long-term gain is taxed at no more than 15%, or 20% at higher incomes. The 3.8% net investment income tax can apply above $250,000 of modified adjusted gross income for joint filers, and New York State and New York City income tax come on top.
Can I do a 1031 exchange on a 2-family house I live in?
Only the rental portion qualifies. IRS Publication 544 excludes real property used for personal purposes, such as your home, so in an owner-occupied 2-to-4 family the unit you live in stays outside the exchange. The rented units can go into a 1031 exchange if the proceeds go to a qualified intermediary and you meet the 45-day identification and 180-day closing deadlines. Cash you take out is generally taxable.
What are the 1031 exchange deadlines?
You must identify the replacement property in writing within 45 days of transferring the building you sell, and receive it within 180 days of that transfer, or by your tax return due date for that year including extensions, if that comes first. The sale proceeds must go to a qualified intermediary, not to you. Since 2018 only real property held for investment or business use qualifies.
Can I exclude the gain on the unit I live in?
Possibly. IRC section 121 lets an owner exclude up to $250,000 of gain on a main home, or $500,000 for most married couples filing jointly, after owning and living in it for at least 24 months of the five years before the sale. In a 2-to-4 family, only the gain allocable to your own unit can be excluded, and the exclusion does not cover depreciation taken on the rented units.
Do heirs pay capital gains tax on an inherited NYC multifamily?
Generally not on the gain built up during the owner's life. Under IRC section 1014, property acquired from a decedent takes a basis equal to its fair market value on the date of death, so heirs who sell at that value are not taxed on the old gain, depreciation portion included. A building given to family during life is different: it generally keeps the giver's original basis under IRS Publication 551.
Sell, hold, or exchange: start with your own numbers
Milton Coste, Licensed Real Estate Associate Broker, licensed since November 2001 with more than 1,100 transactions across the five boroughs. I am not your accountant or your attorney, but I can tell you what your building is likely to sell for and what a buyer will ask about before you decide.
Open the Should I Sell ToolThis is planning context, not legal or tax advice. Citations are to IRC sections 121, 1014, 1015, 1031 and 1250 as described in IRS Topics 409 and 559 and IRS Publications 523, 527, 544 and 551, and to New York State Department of Taxation and Finance guidance on New York City personal income tax, all as of September 23, 2026. Rent registration requirements are those published by New York State Homes and Community Renewal. Rates and thresholds change, and the cap rate cutoffs above are a personal rule of thumb, not a market rate or a forecast. Confirm your own position with a New York attorney and a tax professional before selling, exchanging, or transferring any property.
