The short answer
Because Form PIT-1 starts from federal adjusted gross income, a New Mexico owner who completes a §1031 exchange reports no state gain in the exchange year. Since tax year 2025 the state's capital gains deduction for real estate is capped at $2,500, so a cash sale is taxed at graduated rates up to 5.9% with almost no relief, which makes deferral more valuable here than it was before House Bill 252. There is no transfer tax and no closing withholding, and New Mexico has no rule tracking deferred gain that leaves the state.
New Mexico at a glance
| State tax on real estate gains | Graduated 1.5%–5.9%; 5.9% starts above $210,000 single, $315,000 joint (tax years 2025+) |
|---|---|
| Capital gains deduction | Greater of $2,500 or 40% of up to $1M gain from selling a NM business; realty: $2,500 |
| Transfer tax | None; residential deeds need a transfer declaration affidavit (§ 7-38-12.1) in 30 days |
| Closing withholding | None on real estate; withholding applies to nonresident pass-through owners under § 7-3A-3 |
| Deferred-gain tracking | None |
| Property tax reset | Residential values capped at 3%/yr; reset to market the year after a change of ownership |
| Gross receipts tax | Real property sales and leases are deductible from GRT; lodging under a month is not |
HB 252 cut New Mexico's capital gains deduction to $2,500 for real estate, so deferral is worth more
Through tax year 2024 a New Mexico taxpayer could deduct the greater of $1,000 or 40% of net capital gain, which took real bite out of the state tax on a property sale. House Bill 252 (2024) rewrote NMSA 7-2-34 starting with tax year 2025: the deduction is now the greater of $2,500 or 40% of up to $1 million of net capital gain from the sale of a business allocated or apportioned to New Mexico.
Gain from selling a rental, a commercial building or land is not gain from the sale of a business under that wording, so a real estate investor's deduction is capped at $2,500 no matter how large the gain. On a $600,000 gain the old rule sheltered $240,000; the new rule shelters $2,500.
That change is the main reason a New Mexico owner should look at a like-kind exchange before a cash sale. The PIT-1 takes its starting number from the federal return, and an exchange keeps the gain off that return, so New Mexico's tax waits as long as the federal tax does.
A recognized gain is taxed at up to 5.9%, and nonresidents allocate it on Schedule PIT-B
HB 252 also rebuilt the rate table in NMSA 7-2-7 for 2025 and later years into six brackets from 1.5% to 5.9%. For married joint filers the 5.9% rate begins above $315,000 of taxable income, for single filers above $210,000 and for heads of household above $157,500; the middle brackets are 3.2%, 4.3%, 4.7% and 4.9%.
A resident reports a recognized gain with the rest of the year's income. A nonresident who sells New Mexico property must file when there is a federal filing requirement and any New Mexico-source income, and uses Schedule PIT-B to allocate the gain to New Mexico.
Boot received in an exchange, whether cash or net debt relief, is recognized gain on federal Form 8824 and lands in the same brackets; our eligibility page explains how boot arises.
No transfer tax, but residential deeds need a transfer declaration affidavit within 30 days
New Mexico charges no transfer, deed or documentary tax; counties charge a flat recording fee per instrument. The relinquished sale therefore closes without a transfer-tax line, which sets it apart from most of the states investors compare it with.
What the state does require is disclosure. NMSA 7-38-12.1 obliges whoever presents a deed or real estate contract for residential property to file an affidavit with the county assessor within 30 days stating the parties, the legal description, the full consideration paid including seller incentives, and any personal property included. The assessor keeps it as a confidential record.
Nonresidential property, leases, easements, quitclaim deeds to quiet title, court-ordered conveyances and nominal transfers between spouses or parents and children are exempt, so a commercial exchange records without the affidavit while a residential rental does not.
The 3% residential valuation cap resets the year after a change of ownership
NMSA 7-36-21.2 limits the value of residential property in any tax year to the higher of 103% of the prior year's value or 106.1% of the value two years earlier. The cap disappears when a change of ownership occurred in the year immediately before the tax year: the property is then valued at its current and correct value under the general valuation rules.
For a seller the cap has been holding down the tax bill on a long-held residential rental; for the buyer, including an exchange buyer, the value resets to market in the year after closing and the 3% ceiling starts again from there. Transfers between spouses, to a child who occupies the home, to certain revocable trusts and to correct earlier transfers are not changes of ownership.
The cap is written for residential property, so an exchange into a New Mexico apartment community or a portfolio of single-family rentals should be underwritten at the post-reset tax rather than the seller's current bill.
Gross receipts tax stays out of a real estate sale but reaches short-term lodging
New Mexico's gross receipts tax is broad, but NMSA 7-9-53 allows a deduction for receipts from the sale or lease of real property. A sale of a rental or commercial building to an exchange buyer, and the ordinary rent it earns, are outside the tax, with two exceptions the statute names: receipts from oil, gas and mineral interests, and the portion of a sale price attributable to improvements the seller built in the ordinary course of a construction business.
Receipts from hotels, motels, campgrounds and similar facilities for stays of less than one month are not deductible. An owner exchanging out of a short-term rental has been collecting and remitting gross receipts tax on those stays, and the buyer inherits the same obligation.
New Mexico withholds nothing at closing and never follows deferred gain out of state
New Mexico does not withhold tax from a nonresident's real estate sale proceeds at closing. Its withholding rules for investors sit at the entity level: NMSA 7-3A-3 requires a pass-through entity to withhold on a nonresident owner's share of net income at a rate capped at the top individual bracket, with a $100 floor and an exception for owners who agree in writing to pay the department directly.
The state also has no rule that follows deferred gain out of New Mexico. A nonresident who exchanges Santa Fe or Las Cruces property into real estate elsewhere is done with New Mexico for that asset; a resident remains taxable on a later recognized gain, and NMSA 7-2-13 gives a credit for the other state's income tax, though not for any city or county tax.
Replacement property
A DST lets a New Mexico seller swap 5.9% on future rent for the property state's rate, offset by a resident credit
Sponsors rarely hold New Mexico assets, so the rent and eventual gain from a DST are sourced to the states where its buildings stand. A New Mexico resident reports that income on the PIT-1 at the state's graduated rates and claims the credit under NMSA 7-2-13 for income tax paid to the property's state, limited to New Mexico's own tax on that income; a DST in a state without an income tax produces no credit.
The $2,500 cap on the capital gains deduction applies again when a resident eventually recognizes gain on a DST interest, one more reason New Mexico investors tend to keep exchanging rather than liquidate; the DST cash-out option is described on its own page.
A nonresident who exchanges New Mexico property into an out-of-state DST has no further New Mexico filing for that investment. Confirm the allocation and credit computation with your CPA and the Taxation and Revenue Department.
Questions investors ask about 1031 exchanges in New Mexico
Can I still deduct 40% of the gain when I sell a New Mexico rental?
Not for tax years beginning in 2025 or later. The 40% deduction now applies only to gain from selling a New Mexico business, up to $1 million; gain on real estate qualifies for the flat $2,500 alternative.
I live in Texas and am selling Albuquerque property in an exchange. Does New Mexico hold back tax at closing?
No. New Mexico has no real estate withholding. If gain is recognized you file a PIT-1 with Schedule PIT-B; if the exchange is complete, there is no New Mexico gain to allocate.
Will property taxes on my relinquished rental jump for the buyer?
For residential property, yes: the 3% cap under NMSA 7-36-21.2 does not apply in the year after a change of ownership, so the assessor values the property at its current and correct value.
Is gross receipts tax due on the sale?
No. Receipts from the sale or lease of real property are deductible under NMSA 7-9-53, except the portion attributable to improvements built by a seller in its own construction business.
Does New Mexico track deferred gain after I exchange into an out-of-state DST?
No. There is no tracking form; a resident is taxed only when gain is recognized, and a nonresident's later sale is outside New Mexico's reach.
Sources
The rules above were checked against these publications on September 18, 2026. Rates and forms change; confirm the current version with your CPA and the New Mexico tax agency before you close. This page is general information, not tax or legal advice.
- House Bill 252 (2024), final version amending NMSA 7-2-7 and 7-2-34
- Personal Income Tax overview, New Mexico Taxation and Revenue Department
- NMSA 7-2-13, credit for taxes paid other states
- NMSA 7-36-21.2, limitation on increases in valuation of residential property
- NMSA 7-38-12.1, residential property transfer affidavit
- NMSA 7-9-53, gross receipts deduction for sale or lease of real property
- NMSA 7-3A-3, pass-through entity withholding
- New Mexico deed requirements (no transfer tax), DeedClaim