12 Dec Tax complexities of selling a home in New Jersey
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Q. No one I ask seems to know what percentage of your home sale New Jersey takes when you sell and leave the State. Do they take a percentage of the total of the sale or do they take a percentage of the profit that you make from that sale (assuming there is one) and what is the amount of that percentage?
A. Ah, if only it was that simple.
The reason no one can give you a simple percentage is because there is no simple percentage. When selling a home in New Jersey, you could be in for a variety of different taxes.
Michael Maye, a certified financial planner and certified public accountant with MJM Financial Advisors in Gillette, breaks them all down.
First, there’s a realty transfer tax, which is based on the home’s selling price.
“For example, a home that sold for $750,000 would pay roughly $6,775 during the home closing process,” Maye said. “This tax was established in 1968 to offset the cost of tracking real estate transactions. Payment of this fee is required before the deed can be recorded.”
Then there’s the state’s so-called mansion tax, which is a one percent tax levied on homes sold for more than $1 million. This is paid by the buyer, Maye said.
The third tax you might be subject to when selling your New Jersey is personal income tax.
“The highest personal income tax rate in New Jersey is currently 8.97 percent,” he said. “So if you did have a gain on the sale of your home, the tax rate will be based on your New Jersey income tax bracket.”
He said the personal income tax might even be zero if you qualify for the capital gain exclusion under Section 121 of Federal tax code. More on that in a moment.
Non-New Jersey residents who sell a home in the state are also subject to what many call the “exit tax.”
“The New Jersey ‘exit tax’ is really a misnomer as it is an estimated New Jersey income tax payment or withholding,” Maye said.
NJ Form GIT/Rep-3, Seller’s Residency Certification/Exemption, lists the eight exemptions to the “exit tax.”
Maye said two of the more common exemptions are being a New Jersey resident taxpayer or if the property being sold qualifies as your principal residence under Section 121 of the Federal IRC code. If you don’t qualify for any of the exemptions, the minimum “exit tax” is 2 percent of the sale price.
“However, if you are subject to the `exit tax,’ you can to claim the ‘exit tax’ withheld on your New Jersey tax return and could possibly receive a refund depending on your overall New Jersey tax liability situation,” Maye said.
Now, more on what you’d possible owe in income tax, and the possible capital gains exclusion on the sale, and how the “exit tax” fits in.
The income tax applies to the taxable gain on the home sale, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.
He said the taxable gain is from the following formula: the sales price minus the costs of sale equals “net proceeds.” Costs of sale include sales commissions, legal fees, realty transfer fees, and more. Next, you subtract the “adjusted basis” of the property sold. Adjusted basis is tax-speak for your home’s original cost, plus improvements made over the years. Net proceeds minus tax basis equal the gain on the sale.
“If the house sold was your principal residence for 36 out of the last 60 months you get one more adjustment to arrive at taxable gain,” he said. “If you are single, you get to subtract $250,000 from the homes gain, and $500,000 if you are married filing jointly to arrive at your taxable gain.”
This $250,000/$500,000 adjustment does not apply to second homes, vacation homes or investment property, he said, and in many cases, the principal residence adjustment completely offsets the gain on the sale of your home.
If you have a taxable gain, Kiely said you must include it on your New Jersey resident, New Jersey part-year resident or New Jersey non-resident income tax return.
New Jersey does not have the concept of a preferential capital gains tax rate, Kiely said. A capital gain is taxed the same as interest, dividends or wages.
“The problem New Jersey had was people who moved out of New Jersey or those who never resided here would take their home sale gain and never pad the state its due,” he said. “So on June 29, 2004 New Jersey enacted P.L. 2004, Chapter 55. This law requires sellers of real estate who are not residents of New Jersey to make an estimated income tax payment on the gain from the sale.”
That’s the “exit tax.”
Kiely said the law prohibits a county recording officer from recording any deed for the sale of real property unless accompanied by an appropriate form. So in order for the buyer to have the new deed recorded, they must file one of four forms completed by the seller.
The most common form that the non-resident seller must complete is form GIT/REP – 1.
“This form is then given to the buyer’s attorney or title agent along with the appropriate estimated tax payment,” Kiely said. “When the GIT/REP- 1 form and payment are filed with the county recording officer, the recording officer will then record the buyer’s new deed.”
Calculating the “exit tax,” or the estimated tax due is equal to the gain reportable for federal income tax purposes, if any, multiplied by the highest New Jersey tax rate for that year.
As Maye said earlier, it’s no less than 2 percent of the sale.
“So if the non-resident sells the property for a loss, they must still make an estimated tax payment of 2 percent of the sale amount,” Kiely said.
If you sell your New Jersey home and buy a new home in New Jersey you would file form GIT/REP -3, he said. You’d check the first box, which indicates that you are a New Jersey resident and will file a resident gross income tax return and pay any applicable taxes on any gain from the sale. You would not have to make an estimated tax payment.
Kiely said if the house you sold was used exclusively as your principal residence within the meaning of IRS Code section 121, you would check box No. 2 on form GIT/REP – 3.
“This section of the code covers the forgiveness of gain on the sale of your principal residence,” he said. “Under this section, the first $250,000 of gain on the sale of your principal residence is forgiven; $500,000 for a married couple.”
“So if you sell your home and move to Florida, you wouldn’t have to make an estimated tax payment if the home was your principal residence and you made less than $250,000/$500,000. If you moved to Florida and then sold your principal residence home box No. 2 would still apply,” Kiely said
Because IRS Code section 121 only applies to the sale of your principal residence, it would not apply to the sale of a vacation or second home. Kiely said if you sell your second home while you are a New Jersey resident, you would pay the appropriate tax when you filed your New Jersey Resident income tax return. If you moved to Florida and then sold your second house you would be required to make the estimated tax payment.
And finally, when you file your New Jersey Part-Year Resident or Non-Resident tax return, the tax would be calculated on your actual New Jersey income.
“The tax rates start at 1.4 percent and rise to 8.97 percent. As a non-resident, you made an estimated tax payment of 8.97 percent of the gain or 2 percent of the sales price, whichever was higher,” Kiely said. “Accordingly, you would be due a refund, especially if you paid in the 2 percent of the sales price and actually lost money on the sale.”
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