If I Sell my New Hampshire Home Will I Owe Capital Gains Tax?

We hear questions like this one often these days.

“I’m thinking of selling my home in Portsmouth, but the value has increased substantially since we bought it. Will we have to pay a lot of taxes if we sell?”

The best answer is maybe…….or maybe not. There are several ways for you to keep some or all of your profits if your home’s value has increased.

First, let’s be clear on what a capital gain is.

A capital gain is the profit you receive when you sell your house and pay off any mortgages and selling expenses. Here’s how a capital gain on the sale of residential real estate is calculated:

1. Calculate the Cost Basis: This is the original purchase price of the property, including any additional costs such as closing costs, legal fees, and real estate agent commissions. You can also include the cost of improvements that increase the property’s value, such as renovations or additions like a garage or sunroom. The cost basis is used to determine the property’s adjusted basis.
2. Calculate the Adjusted Basis: To calculate the adjusted basis, you’ll need to subtract any depreciation taken on the property from the cost basis. Depreciation is a tax deduction taken for the gradual decrease in the value of the property over time.
3. Determine the Selling Price: This is the amount for which you sell the property.
4. Calculate the Capital Gain: Subtract the adjusted basis from the selling price to determine the capital gain. If the selling price is higher than the adjusted basis, you have a capital gain. If it’s lower, you have a capital loss.
5. Determine the Holding Period: The holding period is the length of time you’ve owned the property. If you’ve owned the property for one year or less, it’s considered a short-term capital gain. If you’ve owned it for more than one year, it’s considered a long-term capital gain.
6. Apply the Appropriate Tax Rate: Short-term capital gains are typically taxed at ordinary income tax rates, which can range from 10% to 37% depending on your income level. Long-term capital gains are taxed at lower rates, which are 0%, 15%, or 20% depending on your income level.

Here’s a hypothetical example:

The median price for a single-family home 🏠🏡 in Portsmouth in February 2011 was $546,500. And let’s say you added a two-car garage sometime later for $35,000. That would make your cost basis $581,500. You did not claim anything for depreciation. The median price for a single-family home in Portsmouth in March of 2024 is $1,000,000. So let’s say you sell your house for the median $1,000,000 price. You would subtract the adjusted cost basis from the sales price to arrive at your capital gain.

$1,000,000 – $581,500=$418,500 or your capital gain tax liability on the sale.

Now let’s follow this hypothetical scenario to its conclusion on April 15th of the following year when income taxes are due. If you’re a married couple who have lived in your home for at least two of the past five years and file a joint return, you are allowed a $500,000 exemption under IRS rule 121 (discussed below) for your principal residence. Congratulations, that $418,500 profit is all yours and can be spent on whatever you choose.

Here are some ways to reduce your federal capital gains tax on the sale of your home

1. Use the “121 rule”. The good news there is an Internal Revenue Service (IRS) rule that lets you exclude a portion of a capital gain from tax and that is IRS Rule 121 which says: “The primary residence exclusion under §121 allows taxpayers to exclude up to $250,000 of gain when selling their primary residence*, provided they have owned the property and lived in it as a primary residence for at least two (2) of the past five (5) years. This tax benefit can be used once every two years. The exclusion is $500,000 for a married couple that files a joint return. Note that each spouse must have lived in the subject property for the requisite two of the past five years, and neither spouse may have used the exclusion on another home in the previous 2 years.”
2. If you don’t need all the money immediately, you can take an installment sale and collect your payments over two or more years to reduce your income from that year. The IRS says income isn’t income until you receive it. So if you realize $100,000 in capital gains from the sale of your home or another asset, you can choose to receive payments in installments, for example, you can take $50,000 in November of one year and the second $50,000 in January of the following year. That would reduce your income from the $100,000 capital gain by $50,000 each year and lessen your taxes.
3. There’s also a technique called “tax-loss harvesting” “Tax-loss harvesting is a tactic that involves selling investments at a loss to offset capital gains from other investment sales. In this case, if you made a profit on your home sale, you can use losses from other investments to reduce your taxes. For example, if you earn $300,000 in capital gains on a home sale but lose $100,000 after selling other assets, only $200,000 will be taxed.
4. Before using any of the techniques outlined above you should seek the guidance of a qualified tax professional such as a Certified Public Account or other tax professional. I am not a tax professional but I can refer you to one.

Does New Hampshire have a capital gains tax on the sale of real estate?

You are in the clear in the “Live Free Or Die” state, New Hampshire does not have a capital gains tax on the sale of real estate.

Are you ready to get started?

If you are ready to begin the selling process or just want to sit down and talk about the market and your options, we’re ready too. Ann Cummings and Jim Lee are your local experts in the New Hampshire Seacoast and southern Maine real estate market. Give us a call and let’s talk.