The birth of Grace Church took place in 1849, when the Reverend Cornelius Winter Bolton and Adele Bolton, son and daughter of the rector of Christ Church in Pelham Manor, New York, visited nearby City Island, (which until 1895 was part of the town of Pelham), and offered the residents a Sunday afternoon service, every second Sunday, which was readily accepted and largely attended. The services were held in Union Chapel, a charming picturesque cottage that still stands at the corner of Tier Street and City Island Avenue. Reverend Bolton subsequently moved to a parish in Maryland, and when he returned in 1855, he again visited City Island and renewed the offer of his services, but by then Union Chapel had become the Methodist church, so he had to look elsewhere for a location.

In the meantime, Adele and her sister Nanette Bolton had remained intensely interested in the work of the church, and in spreading the Gospel to Island residents. Adele, and Reverend Bolton had to be rowed to City Island from the mainland to minister to the fledgling congregation, as there was no bridge at the time. In 1862 the Reverend M. M. Dillon, then pastor of Christ Church reported that "a church is in the process of erection" on City Island (its total cost being $3,000, including contributions from the "young ladies of Pelham Priory", City Island residents, and $944 collected by Adele Bolton herself). The land was donated by G.W. Horton Jr., who served as Church Warden for 41 consecutive years, from 1866 to 1906.

The Bolton family was known for its creativity, especially in the design and manufacture of stained glass. "The Adoration of the Magi" window at Christ Church (the first known figurative stained-glass window made in America) was designed and made by Cornelius’s brother William, assisted by their brother John.

Grace's altar window, picturing "The Trial of Christ," was created by John Bolton, who was, by profession, an architect, (a profession he later left to become an Episcopal clergyman). John fashioned his window after a version made by his brother, William Jay for the church of St. Ann and the Holy Trinity in Brooklyn. In 2016, this historic window was removed and restored, through grants from the Diocese, and private donations.

If you look upward into the rafters at Grace Church, you will see evidence of craftsmanship of a different kind---that of shipbuilding, for the church was constructed by carpenters from the nearby David Carll shipyard. David Carll was a vestryman of the church for 24 consecutive years, from 1866 to 1889. The architecture of the church is termed “Carpenter Gothic,” a popular late Victorian style.

In 2007 Grace Episcopal Church was named to the National Register of Historic Places for its architectural and historical significance.

In 2008, during the replacement of the church roof, Grace's original wooden cross was removed and donated to the City Island Historical Society and Nautical Museum. In its place are two  handmade crosses, constructed of wood and copper, which will be enduring symbols of God's grace for generations to come.