The synthesis and characterization of various rare-earth (RE)-doped and codoped yttrium oxide (Y2O3) nanomaterials were undertaken in the current work. RE dopants such as terbium (Tb), europium (Eu), and erbium (Er) were successfully doped, and ytterbium (Yb)−Er was codoped into Y2O3 nanomaterials. The as-synthesized nanomaterials are highly dispersed in the organic phase. X-ray diffraction peaks can be assigned to cubic Y2O3, which confirms the crystallinity of the as-prepared Y2O3 samples. Room temperature photoluminescence (PL) spectra showed characteristic emission peaks of Tb-, Eu-, and Er-doped Y2O3 samples. Up-conversion spectra of green and red emissions were also shown for Er−Yb-codoped Y2O3 samples. It was found that the intensities of the green and red emissions could be altered by varying the dopant concentration. The nanocrystals were surface-functionalized with an amine (NH2) group via a reverse microemulsion method. The amine groups render the nanocrystals water-soluble and also afford them with the possibility of further functionalization by other biomolecules. in vitro cytotoxicity studies showed that the synthesized nanocrystals have no appreciable toxicity on human hepatocellular carcinoma (Hep-G2) cells at concentrations of 0.007−0.063 mg/mL. Because of the Y2O3:RE nanomaterials’ well-dispersity in water, low toxicity, and good PL, they can potentially be used as fluorophores in bioimaging.