Most homeowners assume they’ll owe a large tax bill when they sell for a profit. The reality: the majority of primary residence sellers in Southern NH and Northern MA owe zero federal capital gains tax home sale. Here’s why — and when that changes.
Note: this is educational information, not tax advice. Your specific situation should be reviewed with a CPA.
The Rule That Protects Most Sellers: IRS Section 121
Understanding Capital Gains Tax Home Sale
The IRS allows you to exclude up to $250,000 in capital gains from the sale of your primary residence if you’re single, or up to $500,000 if you’re married filing jointly. This is not a deferral — the excluded gain is simply not taxed.
To qualify, you must pass two tests: you must have owned the home for at least two of the last five years, and you must have used it as your primary residence for at least two of the last five years. Those two years don’t have to be consecutive.
What ‘Capital Gain’ Actually Means Here
Your gain is the difference between your adjusted sale price (after selling costs) and your adjusted cost basis (what you paid, plus the cost of any capital improvements you made over the years). Major renovations, additions, and permanent upgrades can increase your basis and reduce your taxable gain.
Keep records of capital improvements. They can make a real difference if your gain is close to the exclusion threshold.
When It Gets Complicated
- You moved out and rented the home: The exclusion can still apply if you sell within three years of moving out. Beyond that, the rental period may reduce the excludable portion.
- You inherited the home: You receive a stepped-up basis to fair market value at the date of the owner’s death. You only owe gains on appreciation after you inherited it — not the full increase from when the original owner bought it.
- Your gain exceeds the exclusion threshold: Any gain above $250K/$500K is generally taxed as long-term capital gains (15–20% federally for most sellers).
- You haven’t lived there two years: A partial exclusion may apply for job relocation, health reasons, or certain unforeseen circumstances.
The Massachusetts Layer
New Hampshire has no state income tax, so NH sellers don’t have a state capital gains concern. Massachusetts taxes long-term capital gains at the standard 5% income tax rate. Short-term gains (assets held under one year) are taxed at 12% in MA.
For most sellers whose gain falls within the federal exclusion, there’s no MA tax consequence either. But if your gain exceeds the federal threshold, you’ll want to understand the MA treatment as well — another reason to bring in a CPA.
One final note: if you own property in both states, each follows its own tax rules — a NH primary residence with a MA rental property means different treatment for each. Your CPA can walk you through the state-specific calculations.
Massachusetts taxpayers should also be aware of the state’s 4% surtax on income over $1 million — while this primarily affects wages, it can apply to capital gains that push total income over that threshold in a given year.
Know Your Numbers Before You Close
Understanding your estimated net — including how the tax calculation fits in — is part of making a smart selling decision. Don’t worry. We have the tools and experience to help you figure it out.
Ready to take the next step?
- Estimate your sale proceeds with our net proceeds calculator
- Schedule a free consultation with Rob
