Capital Gains Tax on Real Estate in Maine

When you sell a property in Maine for more than you paid, the resulting profit is considered a capital gain. This gain can be subject to taxes at both the federal and state levels. The tax implications vary based on how long you owned the property and whether it was your primary home.

Calculating Your Real Estate Capital Gain

To calculate your capital gain, the formula is the property’s sale price minus its adjusted basis. This figure is the foundation for any tax you might owe.

The sale price is the gross amount you sold the property for, but you can subtract certain selling expenses to arrive at the amount realized. These deductible expenses include real estate broker commissions, legal fees for the closing, advertising costs, and any transfer taxes you paid as the seller. For example, if you sold a property for $400,000 and paid $20,000 in broker commissions and $2,000 in legal fees, your amount realized would be $378,000.

The adjusted basis begins with the original purchase price of the property, including certain closing costs from when you bought it, like title insurance. This figure is then adjusted over the time you owned the property. The basis increases with the cost of capital improvements, which are expenditures that add to the property’s value or prolong its life, such as a new addition or a roof replacement.

Conversely, the basis decreases by certain items. If you rented out the property and claimed depreciation deductions, your basis is reduced by the amount you took. Insurance reimbursements for casualty or theft losses also decrease your basis. A repair, like fixing a leaky faucet, maintains the property’s condition but does not increase your basis.

Federal and Maine Tax Treatment

The tax treatment depends on how long you owned the property. The federal government categorizes gains as either short-term or long-term, with different tax rates applying to each.

A short-term capital gain results from the sale of property held for one year or less. This type of gain receives no preferential tax treatment and is taxed at your ordinary income tax rates, which for 2025 range from 10% to 37%.

A long-term capital gain, from property held for more than one year, is taxed at lower federal rates. For 2025, these rates are 0%, 15%, or 20%, with the specific rate determined by your filing status and taxable income.

Maine does not have a separate, preferential tax rate for capital gains. Any gain is treated as regular income and is subject to the state’s standard income tax rates.

For the 2025 tax year, Maine has three progressive income tax brackets with rates of 5.8%, 6.75%, and 7.15%. A significant real estate gain could push a taxpayer into a higher state income tax bracket, subjecting a portion of that gain to the top rate.

The Primary Residence Exclusion

A tax benefit available to homeowners is the primary residence exclusion, often referred to as the Section 121 exclusion. This federal rule allows many individuals to sell their main home without paying any capital gains tax on the profit. If you qualify, you can exclude up to $250,000 of the gain from your income if you are a single filer, and that amount doubles to $500,000 for married couples who file a joint tax return.

To be eligible for this exclusion, you must meet two primary tests. The Ownership Test requires that you have owned the home for at least two of the five years leading up to the date of sale. The Use Test requires that you have lived in the home as your principal residence for at least two of the five years before the sale.

This exclusion can only be used once every two years. Because Maine conforms to the federal tax code, any gain excluded on your federal return is also automatically excluded from your Maine state income tax calculation.

Maine Real Estate Withholding for Nonresidents

A specific compliance rule applies to individuals who are not residents of Maine when they sell property located within the state. Maine law requires the buyer of the real estate to withhold a portion of the sale proceeds from the nonresident seller. This withholding acts as a prepayment of the estimated Maine income tax that the seller will owe on the gain from the sale, and it applies to property sales where the consideration paid is $100,000 or more.

The amount required to be withheld is 2.5% of the total sale price. The buyer, or more commonly the settlement agent handling the closing, is responsible for collecting this amount and remitting it to Maine Revenue Services. The payment is sent along with Form REW-1, the Real Estate Withholding Return, which must be filed within 30 days of the property transfer date.

The nonresident seller will receive copies of the completed Form REW-1. When they later file their Maine nonresident income tax return (Form 1040ME), they will report the actual capital gain and calculate the tax due. The amount that was withheld is then claimed as a tax payment against their total Maine income tax liability, and if it exceeds the tax owed, the seller will receive a refund.

Reporting the Sale on Your Tax Returns

You must report the sale to the IRS and Maine Revenue Services even if you qualify for an exclusion, especially if you receive a Form 1099-S, Proceeds From Real Estate Transactions.

For your federal return, you will use Form 8949, Sales and Other Dispositions of Capital Assets, to provide the specific details of the sale. This includes the property description, the dates you acquired and sold it, the sales price, and your cost basis. The totals from Form 8949 are then carried over to Schedule D, Capital Gains and Losses, and the final net gain is transferred to your main Form 1040.

The information from your federal return flows directly to your Maine income tax return, Form 1040ME. The starting point for the Maine return is your Federal Adjusted Gross Income, which already includes the taxable portion of your capital gain. Because Maine conforms to federal rules like the primary residence exclusion, no complex adjustments are needed for a straightforward real estate sale.