Here we report the synthesis, characterization and application of a multifunctional surface functionalized GdF3:Nd3+ nanophosphor that exhibits efficient near infrared (NIR) fluorescence as well as magnetic properties, which can be utilized for bimodal imaging in medical applications. The nanoparticles are small with an average size of 5 nm and form stable colloids that last for several weeks without settling, enabling the use for several biomedical and photonic applications. Their excellent NIR properties, such as nearly 11 % quantum yield of the 1064 nm emission, make them ideal contrast agents and biomarkers for in vitro and in vivo NIR optical bioimaging. The nanophosphors which were coated with poly(maleic anhydride- alt-1-octadicene) (PMAO) were implemented in cellular imaging and show no significant cellular toxicity for concentrations up to 200 μg ml-1. Furthermore, the incorporation of Gd into the nanocrystalline structure supplies exceptional magnetic properties, making them ideal for use as magnetic resonance imaging (MRI) contrast agents. The utility of these NIR emitting nanoparticles in infrared bioimaging and as contrast agent in magnetic resonance imaging was demonstrated by confocal imaging, magnetic resonance and tissue experiments.