Capital Gains Tax vs. Estate Tax: Which Should a New York Family Plan Around?

Every lifetime gift of an appreciated asset trades an estate tax saving for a capital gains tax cost. Which one is bigger depends almost entirely on the size of your estate.

Clients often come to us wanting to “get the building out of the estate.” Sometimes that is exactly right. Just as often it is a mistake that would cost the children hundreds of thousands of dollars in capital gains tax to avoid an estate tax the family was never going to pay. A gift during life removes an asset from the estate, but the recipient inherits the donor’s tax basis and pays income tax on the entire gain when the asset is sold. An asset held until death gets a new basis equal to its date-of-death value, and the gain simply disappears, but the asset is counted in the estate.

For a New York family the answer turns on three thresholds: the $7,350,000 New York exclusion, the cliff just above it, and the $15,000,000 federal exemption. This page lays out the rates on both sides, gives a decision rule for each estate size, works through a real example and lists the special cases that change the analysis.

The Core Trade-Off

When you give property away during life, the recipient takes your basis under § 1015. This is called carryover basis. If you bought a brownstone for $400,000 and give it to your daughter when it is worth $2,000,000, her basis is $400,000, and when she sells she pays capital gains tax on everything above that figure. The gift removed $2,000,000 and all future appreciation from your estate, which is the point, but it preserved $1,600,000 of taxable gain that would otherwise have vanished.

When you hold property until death, § 1014 gives the person who inherits it a basis equal to its fair market value on the date of death. The same brownstone, inherited at $2,000,000, can be sold the next month for $2,000,000 with no gain at all. But the full $2,000,000 is in your gross estate, subject to New York estate tax if the estate exceeds $7,350,000 and to federal estate tax if it exceeds $15,000,000. Our page on the step-up in basis covers the mechanics; this page is about choosing between the two outcomes.

The Rates to Compare

The comparison is not simply 23.8% against 40%. Capital gains tax is charged only on the gain, and only if and when the asset is sold. Estate tax is charged on the full value, whether or not anyone sells, and a New York resident may face it at the state level without any federal tax at all.

Two things stand out. The capital gains cost for a New York City family is far higher than the federal 23.8% most people have in mind; we explain the state and city layers on our New York capital gains tax page. And the New York estate tax is, at its top, 16% of the full value, which for a low-basis asset can be less than 38.5% of the gain.

Decision Rules by Estate Size

Under $7,350,000: hold everything for the step-up

An estate below the New York exclusion pays no estate tax at either level. There is nothing to save by giving away appreciated property, and everything to lose: a lifetime gift of a low-basis asset simply hands the capital gains bill to the next generation. Never gift low-basis appreciated assets during life for “estate planning” at this level. Give cash if you want to give, and let real estate, stock and business interests pass at death with a full step-up. A revocable trust, which avoids probate, keeps the step-up intact.

$7,350,000 to $15,000,000: New York tax only, so compare rate against rate

Here the estate faces New York tax at graduated rates from 3.06% to 16%, with the cliff turning a small excess into tax on the whole estate. Compare the New York marginal rate on the asset with the combined capital gains cost of losing the step-up. For a highly appreciated asset the step-up is usually worth more than the New York saving. The better moves are to gift cash or high-basis assets, keep low-basis assets in the estate, use a credit shelter trust so that both spouses’ New York exclusions are used, and, near the cliff, consider a conditional charitable bequest. Remember that taxable gifts within three years of death are added back to the New York estate in any event.

Over $15,000,000: federal 40% usually wins

Once the federal tax applies, every dollar left in the estate costs roughly 49.6 cents. The 38.5% capital gains cost on the gain is smaller than the 40% federal cost on the full value, and the gain is paid only on sale while estate tax is paid regardless. Gift appreciating assets early through a SLAT, a GRAT or a family LLC, accept carryover basis, and let the appreciation compound outside the estate. Then, late in life, use a swap power to pull the lowest-basis assets back into the estate in exchange for cash or high-basis assets, so those particular assets get the step-up after all.

Worked Example: A $2,000,000 Building With a $400,000 Basis

A Brooklyn owner holds a rental building worth $2,000,000 with an adjusted basis of $400,000 after years of depreciation. The built-in gain is $1,600,000. If the building is gifted to a child and later sold at the same price, the federal capital gains tax alone is 23.8% of $1,600,000, or $380,800. For a New York City resident child paying the combined top rate of roughly 38.5%, the cost is roughly $616,000. That is money the family would never pay if the building were inherited instead, because the child’s basis would reset to $2,000,000.

What does holding the building cost in estate tax? It depends on the rest of the estate. If the owner’s total estate, building included, stays under $7,350,000, the answer is nothing, and the gift would have been a pure loss. If the estate is above the cliff, the building is taxed on its full $2,000,000 value at New York’s marginal rates, which run from 12% in the $5,100,000 bracket to 16% above $10,100,000; the tax on the building lands in the same general range as the capital gains cost, and the choice turns on which bracket the estate falls in, whether the child intends to sell, and how long the estate tax can be deferred. If the estate is above $15,000,000, holding the building costs 40% of $2,000,000, or $800,000, in federal tax before New York is counted, and roughly half its value at the combined top rate. At that level the gift wins comfortably, particularly if it is made early enough for the appreciation to accumulate outside the estate.

Special Situations That Change the Answer

• The primary residence exclusion. A homeowner who sells a principal residence can exclude a portion of the gain from federal income tax if the ownership and use tests are met. The exclusion is capped, so for a New York home that has appreciated over decades it typically shelters only part of the gain. It belongs to the seller, so a child who receives the house by gift and does not live in it gets no exclusion, while a parent who holds the house until death passes on a full step-up.
• Inherited property sold soon after death. Because the basis resets to date-of-death value, a sale within months of death usually produces little or no gain, and selling costs can produce a small loss. This is the reason we tell clients under the New York exclusion to stop worrying about their buildings.
• Retirement accounts. IRAs, 401(k)s and annuities never get a step-up. They are income in respect of a decedent, taxed as ordinary income to whoever withdraws the money, and also counted in the estate. Those accounts are the natural source for charitable bequests and the wrong asset to leave to the highest-bracket child.
• Gifts within one year of death. Under § 1014(e), if you give appreciated property to someone who dies within a year and it comes back to you under their will, there is no step-up. Deathbed transfers to a dying spouse to capture a step-up do not work on that timetable.
• Irrevocable grantor trusts. Assets in a completed-gift grantor trust that are not included in the grantor’s estate do not receive a step-up at the grantor’s death (Rev. Rul. 2023-2). The grantor paying the trust’s income tax does not change that. A SLAT or dynasty trust holding low-basis property carries that gain forever unless it is swapped out.

Getting the Step-Up Back

Two techniques let a family that has already moved assets out of the estate recover a step-up for the assets that need it most.

1. The swap power

Most SLATs, GRATs and dynasty trusts we draft are grantor trusts with a power to substitute assets of equivalent value under § 675(4)(C). The power keeps the trust a grantor trust without causing estate inclusion (Rev. Rul. 2008-22). Late in life, the grantor swaps cash or high-basis securities into the trust and takes the low-basis building or founder’s stock back out. The trust keeps its value; the low-basis asset returns to the estate and receives a step-up at death. The swap itself is not a sale, so it triggers no gain.

2. Upstream planning with a general power of appointment

An asset included in someone’s estate gets a step-up regardless of who owned it before. Giving an elderly parent or a trust beneficiary with a small estate a general power of appointment over low-basis trust assets causes those assets to be included in that person’s estate at death, producing a step-up at no estate tax cost as long as their estate stays under the exclusions. The risks are real: the powerholder’s creditors, the New York add-back if the powerholder is a New Yorker with a larger estate than expected, and the § 1014(e) one-year rule if the asset was gifted to the powerholder outright. The power should be limited by formula to the amount that can be included without triggering tax.

Summary Table

How We Help

Before recommending any lifetime gift we build a basis schedule of the client’s major assets and project the estate against the 2026 thresholds. For most New York families that exercise ends the conversation about gifting real estate, because the estate is under $7,350,000 or can be brought under it with cash gifts and a credit shelter trust. For larger estates we design the gift so that the assets most likely to be sold are the ones with the highest basis, we draft every grantor trust with a swap power, and we revisit the plan as the client ages so that low-basis assets are back in the estate when it matters.

Related Estate Tax Planning Topics

• Tax Basis: Step-Up and Carryover – The basis rules for purchased, gifted and inherited property, and the assets that never get a step-up.
• The New York Estate Tax Cliff – Why an estate of $7,717,500 pays about $735,000 while an estate of $7,350,000 pays nothing.
• Spousal Lifetime Access Trust – The most common vehicle for moving appreciating assets out of an estate over $15,000,000 while keeping indirect access.
• Grantor Retained Annuity Trust – Shifting the growth of an asset out of the estate at little gift tax cost, with carryover basis for the remainder.
• A/B Trust – Using both spouses’ New York exclusions without portability, so that mid-size estates avoid the state tax entirely.

Talk to us before you gift appreciated property

We will run the numbers for your estate against the 2026 New York and federal thresholds before any deed changes hands. Call Albert Goodwin at 212-233-1233 or email [email protected] to discuss whether a gift or a step-up is the better path for your family.