Sex chromosomes evolve distinctive types of chromatin from a pair of ancestral autosomes that are usually euchromatic. In Drosophila, the dosage-compensated X becomes enriched for hyperactive chromatin in males (mediated by H4K16ac), while the Y chromosome acquires silencing heterochromatin (enriched for H3K9me2/3). Drosophila autosomes are typically mostly euchromatic but the small dot chromosome has evolved a heterochromatin-like milieu (enriched for H3K9me2/3) that permits the normal expression of dot-linked genes, but which is different from typical pericentric heterochromatin. In Drosophila busckii, the dot chromosomes have fused to the ancestral sex chromosomes, creating a pair of 'neo-sex' chromosomes. Here we collect genomic, transcriptomic and epigenomic data from D. busckii, to investigate the evolutionary trajectory of sex chromosomes from a largely heterochromatic ancestor. We show that the neo-sex chromosomes formed <1 million years ago, but nearly 60% of neo-Y linked genes have already become non-functional. Expression levels are generally lower for the neo-Y alleles relative to their neo-X homologs, and the silencing heterochromatin mark H3K9me2, but not H3K9me3, is significantly enriched on silenced neo-Y genes. Despite rampant neo-Y degeneration, we find that the neo-X is deficient for the canonical histone modification mark of dosage compensation (H4K16ac), relative to autosomes or the compensated ancestral X chromosome, possibly reflecting constraints imposed on evolving hyperactive chromatin in an originally heterochromatic environment. Yet, neo-X genes are transcriptionally more active in males, relative to females, suggesting the evolution of incipient dosage compensation on the neo-X. Our data show that Y degeneration proceeds quickly after sex chromosomes become established through genomic and epigenetic changes, and are consistent with the idea that the evolution of sex-linked chromatin is influenced by its ancestral configuration.