Home Sale Capital Gains

What This Includes

Capital gains tax on the sale of a home depends heavily on how the property was used. For a primary residence, Internal Revenue Code Section 121 allows an owner to exclude up to two hundred fifty thousand dollars of gain, or up to five hundred thousand dollars for a married couple filing jointly, provided the ownership and use tests are met. Those tests generally require the owner to have owned and lived in the home as a primary residence for at least two of the five years preceding the sale. For most homeowners selling a primary residence with typical appreciation, this exclusion eliminates the federal capital gains tax entirely.

The picture changes for a home that was not used as a primary residence for the full holding period, such as a house converted to a rental before being sold, a home used partly as a rental and partly as a residence, or a property that never served as the owner's primary home. In these cases, the Section 121 exclusion may be reduced, prorated, or unavailable, and any depreciation claimed during a rental period is subject to recapture even if the property otherwise qualifies for a partial exclusion.

Where a home does not qualify for the Section 121 exclusion, or where the gain exceeds the exclusion amount, the excess gain is taxed as a capital gain at the federal long term rate of zero, fifteen, or twenty percent, plus the three point eight percent net investment income tax for higher earners, plus New Mexico's graduated state income tax on the same gain. A former primary residence that has been converted to genuine rental or investment use for a meaningful period may become eligible for 1031 exchange treatment on the portion of gain that exceeds the Section 121 exclusion, since Section 1031 applies to property held for investment or business use rather than personal use.

We help Albuquerque, NM homeowners work through whether a sale qualifies for the Section 121 exclusion, how much of the gain is exempt, and whether a converted rental property may support a 1031 exchange for any remaining taxable gain, always in coordination with a qualified tax advisor.

What We Deliver

Review of ownership and use history against the Section 121 exclusion tests

Calculation of excludable gain and any remaining taxable gain

Identification of depreciation recapture exposure from any rental period

Estimate of federal and New Mexico state tax on gain above the exclusion

Evaluation of whether a converted rental property supports 1031 treatment

Coordination with a Qualified Intermediary if an exchange is pursued on the investment portion

Documentation support for ownership and use test qualification

Coordination with the homeowner's tax advisor on final reporting

Common Situations

An Albuquerque, NM homeowner is selling a primary residence with substantial appreciation and wants to confirm how much of the gain is excluded under Section 121.

A homeowner in Albuquerque, NM converted a former residence to a rental several years ago and is unsure whether the exclusion still applies to any part of the sale.

A seller in Albuquerque, NM owns a duplex where they lived in one unit and rented the other, and needs the gain allocated between excluded and taxable portions.

FAQs about Home Sale Capital Gains

How much of the gain on my primary residence is tax free?

If you meet the ownership and use tests, up to two hundred fifty thousand dollars of gain is excluded for a single filer, and up to five hundred thousand dollars for a married couple filing jointly. We help Albuquerque, NM homeowners confirm whether they meet these tests before a sale.

What are the ownership and use tests for the home sale exclusion?

Generally, you must have owned and used the home as your primary residence for at least two of the five years before the sale. We help Albuquerque, NM sellers review their ownership and occupancy history against this requirement.

Can I use the exclusion if I converted my home to a rental before selling?

It depends on how long the property was used as a rental and whether the two year use test within the prior five years is still met. If the rental period is long enough that the use test is no longer satisfied, the exclusion may be reduced or unavailable, and a 1031 exchange may become the more relevant deferral tool. We help Albuquerque, NM owners work through this timing.

Do I owe tax on depreciation taken during a rental period before I sell?

Yes. Depreciation claimed during any period the home was rented is generally subject to recapture even if part of the gain qualifies for the Section 121 exclusion. We help Albuquerque, NM owners quantify this exposure.

Can a 1031 exchange apply to the sale of my home?

A primary residence generally does not qualify for a 1031 exchange because the property is not held for investment or business use. A former residence that has been genuinely converted to rental or investment use for a meaningful period may qualify for the investment portion of its value. We help Albuquerque, NM owners evaluate whether a converted property supports exchange treatment.

What New Mexico tax applies to the taxable portion of a home sale gain?

Any gain not excluded under Section 121 is added to ordinary taxable income and taxed under New Mexico's graduated state income tax brackets, in addition to federal tax. We help Albuquerque, NM homeowners estimate this combined exposure.

Compliance and Limits

Educational content only. Not tax, legal, or investment advice. The primary residence exclusion is governed by Internal Revenue Code Section 121, and exchanges of investment or business use real property are governed by Internal Revenue Code Section 1031. New Mexico imposes a graduated state income tax on any gain not excluded or deferred. Consult with a Qualified Intermediary and a qualified tax advisor before making a sale decision.