Updated October 8, 2026. Quick answer: Generally no, if you qualify for the federal exclusion. The PIT-1 instructions say to “Enter the federal adjusted gross income as reported on your” federal return, which leaves out a gain excluded under section 121. Gain above it is taxed at graduated rates: “Graduated marginal PIT rates range from 1.5% to 5.9%”, after a deduction of up to $2,500 for net capital gains.
New Mexico tax on home sale profit at a glance
| Item | What the documents say |
|---|---|
| Profit on your main home | Starts from federal adjusted gross income; the pages read do not mention section 121 |
| Rate on gain above the exclusion | Graduated: 1.5% to 5.9% |
| Collected at the sale | None found in the documents read |
| Source | New Mexico Taxation and Revenue Department; New Mexico Legislature (RSTP handout) |
What the New Mexico documents say
The 2025 PIT-1 instructions tell filers to “Enter the federal adjusted gross income as reported on your” federal return on line 9. Under the federal statute, “Gross income shall not include gain from the sale or exchange” of a principal residence that meets the ownership and use tests, so an excluded gain never enters federal adjusted gross income. That is reasoning from two documents. The New Mexico pages read never name section 121.
Schedule PIT-ADJ line 16 allows a deduction of “100% of your net capital gains, not to exceed $2,500”. The other alternative, 40% of up to $1,000,000, applies only to gain “from the sale of a business” allocated to New Mexico, so only the $2,500 alternative could apply to the sale of a main home.
On the rate, the Taxation and Revenue Department’s presentation to the Legislature says “Graduated marginal PIT rates range from 1.5% to 5.9%”. The Department’s 2026 withholding publication lists six marginal rates of 1.5%, 3.2%, 4.3%, 4.7%, 4.9% and 5.9%, the same range.
What the federal exclusion requires
Most state answers start here. The statute says “Gross income shall not include gain from the sale or exchange” of property that, during the five years before the sale, you owned and used as your principal residence for periods adding up to two years or more. The limit is “shall not exceed $250,000”, or $500,000 for a husband and wife who make a joint return and meet the statute’s conditions. See CMG’s home sale taxes page and exclusion calculator.
A worked example at a $400,000 gain
An illustration, not a return: a married couple in New Mexico sells their main home with a gain of $400,000 and meets the federal ownership and use tests. The gain is below the $500,000 joint exclusion, so it is not in federal adjusted gross income and, on the documents read, $0 is taxed by New Mexico. As a second illustration, computed below, suppose the gain were $600,000. The amount above the exclusion would then be $100,000; after the $2,500 net capital gains deduction, $97,500 would be taxed at the graduated rates, and this page computes no tax because the bracket depends on the rest of the return.
What is collected at the sale
The documents read show no New Mexico withholding, prepayment or transfer tax on a home sale. That is a gap in what was read, not a statement that none exists; ask the closing agent.
What changes in 2026
New Mexico: the Department’s 2026 withholding publication lists the same six marginal rates, 1.5% to 5.9%, so no rate change was found for 2026.
What the documents do not say
- The pages read never name section 121, so conformity is reasoned from the federal starting point. The Department’s annual rate table with breakpoints was not archived; the 2026 withholding publication lists withholding-method amounts, not return brackets. No sale-time rule was found. The instructions are for tax year 2025.
Common mistakes
- Assuming the 40% business-sale deduction applies to a home; the instructions limit it to a sale of a business.
- Applying 5.9% to the whole gain; the bracket depends on total taxable income and filing status.
- Assuming the answer for one state applies to another, or that the state answer changes the federal tax on the sale.
Related: home sale taxes, state tax on home sale profit, how New Mexico taxes capital gains, New Mexico retirement taxes, and home sale exclusion calculator.
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Answer againSources
- Instructions for 2025 PIT-1: https://realfile.tax.newmexico.gov/2025pit-1-ins.pdf
- Instructions for 2025 PIT-ADJ: https://realfile.tax.newmexico.gov/2025pit-adj-ins.pdf
- Tax Policy 101 (Taxation and Revenue Dept. and LFC presentation, Revenue Stabilization and Tax Policy Committee): https://www.nmlegis.gov/handouts/RSTP%20081425%20Item%201%20-%20Tax%20&%20Rev%20and%20LFC%20-%20Tax%20Policy%20101.pdf
- FYI-104 New Mexico Withholding Tax, effective January 1, 2026: https://realfile.tax.newmexico.gov/FYI-104.pdf
- 26 U.S.C. 121, Exclusion of gain from sale of principal residence (U.S. Code, GovInfo): https://www.govinfo.gov/content/pkg/USCODE-2023-title26/html/USCODE-2023-title26-subtitleA-chap1-subchapB-partIII-sec121.htm
Sources: the primary documents linked above, read on October 8, 2026. General information, not tax advice. Your own facts decide the outcome, and a tax professional or the state agency itself is the right place to confirm anything consequential.