Lanthanide-doped yttrium oxide nanoparticles can display selective upconversion properties, rendering them invaluable in the field of nanomedicine for both sensing and diagnostics. Different syntheses of Er:Y2O3 and Nd:Y2O3 nanoparticles (NPs) were studied and optimized to obtain small particles of regular shape and good crystallinity. The morphological and compositional characterizations of the nanoparticles were obtained with different techniques and showed that both Er:Y2O3 and Nd:Y2O3 NPs were well dispersed, with dimensions of the order of a few tens of nanometers. The photoluminescence and cathodoluminescence measurements showed that both Er:Y2O3 and Nd:Y2O3 NPs had good emission as well as upconversion. The nanophosphors were functionalized by a pegylation procedure to suppress unwanted reactions of the NPs with other biological components, making the NP systems biocompatible and the NPs soluble in water and well dispersed. The pegylated core/shell nanoparticles showed the same morphological and optical characteristics as the core, promoting their strategic role as photoactive material for theragnostics and biosensing.