Real estate tax considerations in New Hampshire

Real estate transactions in New Hampshire invariably carry tax consequences. Whether you are a business owner, investor, or advisor, thoughtful tax planning is critical to preserving value and avoiding costly missteps. This article aims to provide a high-level overview of certain important tax concepts in the context of New Hampshire commercial real estate transactions, including capital gains tax, 1031 like-kind exchanges, the New Hampshire Real Estate Transfer Tax, and depreciation recapture.

Capital Gains Tax

Capital gains tax is triggered when real property is sold for more than its adjusted tax basis. Generally, basis equals the original purchase price, plus qualifying capital improvements and less allowable depreciation. While New Hampshire does not impose a state-level tax on capital gains from the sale of real estate, capital gains tax will still be imposed at the federal level. Federal capital gains tax rates for individuals are typically 15% or 20% depending on income levels, while the portion of gain attributable to prior depreciation deductions may be taxed at a rate of up to 25%. Short-term gains from property held for one year or less are treated as ordinary income.

For business entities, the impact varies depending on tax classification. For an LLC taxed as a disregarded entity or partnership, the capital gains flow through to the LLC’s members. An entity taxed as a C-corporation, on the other hand, pays capital gains tax at a flat 21% corporate rate, and may face an additional tax if profits are later distributed to shareholders. Taxpayers may reduce capital gains exposure by increasing tax basis through legitimate improvements, timing sales to qualify for long-term capital gains treatment, or employing a 1031 like-kind exchange to defer tax recognition. These strategies are frequently used in New Hampshire transactions, particularly for commercial and investment properties.

1031 like-kind exchanges

A 1031 exchange allows investors to defer capital gains tax when exchanging one real property held for investment or business use for another like-kind property. As the name suggests, Internal Revenue Code Section 1031 governs these transactions. A 1031 exchange requires adherence to strict rules and timing requirements, and as such, consulting with an advisor experienced in 1031 exchange mechanics is critical.

While not an exhaustive summary, some important things to consider when planning a 1031 exchange include: a) both the relinquished property and the replacement property must be held for investment or business purposes and cannot be personal residences, b) the seller cannot receive the sale proceeds, which must instead be held by a qualified intermediary to avoid constructive receipt, c) the seller must identify a replacement property within 45 days and must close on that property within 180 days after the sale of the original property.

While a properly structured 1031 exchange defers capital gains tax, any non-qualifying consideration received — such as cash or debt relief, known as “boot” — results in immediate taxation of that portion of the gain.

New Hampshire Real Estate Transfer Tax (RETT)

New Hampshire does not impose a general sales tax, income tax on wages, or state capital gains tax. However, one of its most significant taxes affecting real estate transactions is the Real Estate Transfer Tax (RETT). The RETT, codified at RSA 78-B and NH Code of Administrative Rules, Rev 800, imposes a tax on the sale of real property or an interest in real property. The RETT imposes a 1.5% tax on the purchase price. This tax is traditionally split evenly between the buyer and the seller, though this allocation can be negotiated. Certain transfers of real estate, including transfers to a municipality, non-contractual transfers, or transfers from the owners of an entity to the entity, are exempt from the RETT.

Importantly, the tax applies not only to deeds transferring property directly but also to transfers of controlling interests in business entities that own New Hampshire real estate. This means that even when parties structure a deal as a stock or membership interest sale rather than a direct property sale, the transaction may still trigger the RETT.

Depreciation recapture

Depreciation recapture is another significant tax consideration for owners of commercial real estate. Over time, property owners may deduct depreciation on buildings as an expense that reduces taxable income. When the property is later sold at a gain, the IRS requires the taxpayer to “recapture” and repay the tax savings associated with that depreciation. The portion of the gain attributable to prior depreciation deductions is taxed at a higher rate than long-term capital gains, up to a maximum rate of 25%.

For example, if an investor depreciates $1 million of a building’s value during ownership, that $1 million will be taxed at depreciation recapture rates upon sale, separate from and potentially at a higher rate than the remainder of the capital gain. Even when a taxpayer uses a 1031 exchange, depreciation recapture is only deferred, not forgiven, and may be recognized upon a later taxable disposition of the replacement property.

Given the substantial tax stakes involved — especially in high-value commercial transactions — it is critical for business owners and advisors to address tax planning early in deal structuring. Attorneys, accountants, and investors should collaborate to ensure compliance with all timing and documentation requirements and state-specific tax obligations. Proper planning from the outset can substantially reduce overall tax liability and preserve wealth.

Laura Chadborne is a director in McLane Middleton’s Corporate Department and vice chair of the firm’s Real Estate Practice Group. Jack Hepburn is a member of the law firm’s Corporate Department.