How to save taxes on rental home sale

Photo: castlelass/morguefile.com

Q. I am selling a rental house in New Jersey. Do I have to pay an exit fee if I use a 1031 to purchase a house in Georgia, which will also be a rental? My primary home is in New Jersey.
— Landlord

A. We’ve got some good news for you.

First, the exit fee you refer to — commonly called the exit tax — is for Non-New Jersey residents who sell real estate in the State of New Jersey.

It’s not really a tax, but a pre-collection of potential tax required by the state to make sure those who leave the state eventually file a state return and not leave without paying what may be owed in taxes.

Because you are a resident of New Jersey and are required to file a New Jersey Gross Income Tax Return, this tax withholding requirement does not apply to you, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

Now, the Section 1031 exchange.

Kiely said it’s a simple strategy to postpone paying income tax on the sale of a property that has a gain by exchanging one property for another identical property. For the exchange, you’d have to sell one property that qualifies and then proceed with the acquisition of another property that also qualifies within a specific time frame.

He said the logistics and process of selling a property and then buying another property are practically identical to any standardized sale and buying situation.

But the 1031 exchange is unique because the entire transaction is treated as an exchange and not just as a simple sale, he said.

“It is this difference between `exchanging’ and not simply buying and selling which, in the end, allows the taxpayer(s) to qualify for a deferred gain treatment,” he said. “So to say it in simple terms, sales are taxable with the IRS and 1031 exchanges are not taxable.”

New Jersey recognizes Section 1031 exchanges, Kiely said.

In New Jersey Statute 54A:5-1. “New Jersey gross income defined” it states:

“The term “net gains or income” shall not include gains or income derived from obligations which are referred to in clause (1) or (2) of N.J.S.54A:6-14 of this act or from securities which evidence ownership in a qualified investment fund as defined in section 2 of P.L.1987, c.310 (C.54A:6-14.1). The term “net gains or net income” shall not include gains or income from transactions to the extent to which no recognition is allowed for federal income tax purposes.”

So, Kiely said, if you sell your New Jersey rental and purchase a rental in Georgia you will postpone paying taxes to both the federal government and to the state of New Jersey.

Email your questions to moc.p1558514969leHye1558514969noMJN1558514969@ksA1558514969.

This post was first published in June 2016.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.