New Mexico Depreciation Recapture on Investment Property Sales
When selling investment property in New Mexico, investors must understand how depreciation recapture is treated for tax purposes at both the federal and state level.
Federal Treatment
- New Mexico follows federal depreciation recapture rules under Section 1250 of the IRS code
- Depreciation taken on residential rental property is recaptured at 25% federal rate
- Applies to properties held more than one year
New Mexico State Treatment
- New Mexico taxes depreciation recapture as part of your regular income
- State income tax rates range from 1.7% to 5.9% as of 2023
- No special state rate for depreciation recapture
Frequently Asked Questions
Q: Do I have to pay depreciation recapture if I never claimed depreciation?
A: Yes, you must pay recapture on depreciation you were entitled to claim, even if you didn’t take it.
Q: Can I avoid depreciation recapture with a 1031 exchange in New Mexico?
A: Yes, a properly structured 1031 exchange can defer both depreciation recapture and capital gains taxes.
Q: How is depreciation calculated on New Mexico rental properties?
A: Residential rental properties are depreciated over 27.5 years using the straight-line method.
Q: What happens if I convert my rental property to my primary residence?
A: You’ll still owe depreciation recapture on previously claimed depreciation when you eventually sell.
Q: Does New Mexico offer any special exemptions for depreciation recapture?
A: No, New Mexico does not provide special exemptions beyond federal rules.
Q: How do I report depreciation recapture on my New Mexico tax return?
A: Report it on Form PIT-1 as part of your regular income.
Q: Can losses offset depreciation recapture in New Mexico?
A: Capital losses cannot offset depreciation recapture, but can offset capital gains.
The Bottom Line
New Mexico treats depreciation recapture similarly to federal rules, taxing it as regular income at state rates up to 5.9%. Understanding these rules is crucial for investment property owners to properly plan for tax implications when selling. Consider consulting with a qualified tax professional familiar with New Mexico real estate taxation for specific guidance.