Q. My mom passed away in June and my brother and I inherited her home. It’s valued somewhere around $210,000, which of course is my cost basis. I intend to sell my half of the home to my brother. Does the exit tax apply to me and how?
A. We’re sorry to hear about your mom.
The New Jersey exit tax has a really bad reputation, but it’s really a misnomer.
The good news is that it may not apply to you.
The intention of the exit tax is for the state of New Jersey to ensure collection of income taxes the state is owed by people who sell real estate in New Jersey but are not residents of the state, said Peter McKenna, a certified financial planner with Highland Financial in Riverdale.
He said the so-called tax is really a prepayment of taxes that may be due from the proceeds of a real estate transaction. The actual tax expense related to the sale of the house will be income tax, not an exit tax, and it will be calculated after-the-fact, he said.
“The way the state accomplishes this is by requiring the county clerks to not record any deed transfers unless there is an exit tax pre-payment or proof it doesn’t apply,” McKenna said. “The state doesn’t want to be in the position of chasing after former New Jersey residents for taxes due after they leave the state.”
You can see the required form here.
In your case, McKenna said, it would appear the income taxes due would be minimal, if you owe any at all.
“The way the income tax is calculated is to subtract the cost basis of the home from the sale proceeds,” McKenna said. “Since you and your brother inherited the home from your mother, your cost basis will be half the market value of the home at the time of her passing.”
He said you should have had an appraisal done to determine the value of the house as soon as practical after her passing. If not, you should probably obtain an appraisal now.
McKenna said the amount your brother pays you for your half would be your proceeds, and if that is more than the value when your mom passed, a taxable gain on the sale is subject to federal and New Jersey income taxation.
“In the worst case scenario, you will need to pre-pay 2 percent of your sale proceeds ($2,100) in order to transfer title, and then file a 2016 New Jersey income tax return that calculates the taxable gain,” McKenna said. “You will then receive a state tax refund for the difference between the prepayment and your actual tax due.”
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