Will I owe the ‘exit tax’ when I sell my home?

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Q. I bought my primary residence in 2010 in New Jersey. I lived in the house for six years before I had to move to Texas. I rented the home in 2016, and now I’m selling. I have been filing taxes on the rental as a non-resident. Will I still be paying the exit tax?
— In Texas Now

A. The exit tax isn’t really a separate tax.

Before we get to that, let’s go over the tax rules for when you own a home.

You can exclude up to $250,000 as a single, or $500,000 if married, of the gain on the sale of your main home if three items are true, (other than gain allocated to periods of nonqualified use) all of the following are true.

1. You meet the ownership test. You meet this test if you owned the home for at least two years.

2. You meet the use test. You meet this test if you lived in the home for at least two years.

3. During the year period ending on the date of the sale, you didn’t exclude a gain from the sale of another home.

In most cases, the gain from the sale or exchange of your main home won’t qualify for the exclusion to the extent that the gains are allocated to periods of nonqualified use, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

“Nonqualified use is any period after 2008 during which neither you nor your spouse – or your former spouse – used the property as a main home,” he said, but there are exceptions.

A period of nonqualified use doesn’t include:

1. Any portion of the five-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home;

2. Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty:
a. As a member of the uniformed services,
b. As a member of the Foreign Service of the United States, or
c. As an employee of the intelligence community; and

3. Any other period of temporary absence (not to exceed an aggregate period of the two years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS.

The third exception applies to you.

You did not live in the house for portions of 2016, 2017 and 2018. The fact that you rented the house instead of letting it sit empty does not matter, Kiely said. The exclusion still applies to you.

You stated in your question that you reported the rental income on your tax return. When you reported the rental income you also deducted appropriated expenses such as real estate taxes, mortgage interest and depreciation, he said. The depreciation expense you deducted must be recaptured.

“Depreciation recapture means that all prior depreciation that was `allowed or allowable’ must be included in income and taxed at ordinary tax rates,” he said. “Depreciation recapture is reported on line 12 of the Unrecaptured Section 1250 Gain Worksheet in the instructions for schedule D of Form 1040.”

New Jersey follows federal tax law when it comes to the taxation of real estate.

That means that like the federal government, New Jersey will tax you on the depreciation recapture.

Kiely said will also honor the income tax exclusion. However, because you are no longer a New Jersey resident, you will be required to make an estimated income tax payment at closing.

“The estimated tax payment is 2 percent of the sales price of the house,” he said. “When you file your New Jersey Non-Resident Income tax return you will receive a refund of all or part of your estimated tax payment.”

This is an estimated tax payment and not a real separate exit tax.

Good luck with the sale of your home.

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