02 Dec What taxes are due when I sell my home?
Q. I am in the process of selling my home in New Jersey and moving into a house with my son and his family in South Carolina, therefore I will not be buying another house. I am an 86-year-old widow. After waht I have paid for improvements, I will realize a profit of about $100,000. What taxes will be due?
A. Good luck on your move to South Carolina.
When a New Jersey resident sells a home, there are income tax implications – which may include the withholding of estimated taxes, known as the exit tax – and New Jersey real estate transaction fees.
Let’s start with income tax implications first.
For federal income tax purposes, as an individual taxpayer you may qualify to exclude up to $250,000 of any gain from the sale of your home as a so-called Section 121 exclusion, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.
He said in order to qualify you must meet an ownership test and use test.
“The use test is that you must have lived in your home for two of the past five years,” Maye said. “Also, you can generally must not have excluded the gain from the sale of another home during the two-year period prior to the sale of your home.”
So the good news is that for federal income tax purposes, if you meet the requirements, you can exclude the capital gain of $100,000, Maye said.
You can learn more on the IRS website.
The State of New Jersey follows the federal home sale capital gain exclusion rules, so if you qualify, you won’t owe to New Jersey.
Even if there is no tax liability to New Jersey, an estimated state income tax may be withheld at the time of the closing. More on that in a moment.
As the seller, you will have to pay a Realty Transfer fee (RTF), which is typically around 1%, Maye said.
“The State of New Jersey collects an RTF on a seller whenever there is a transfer of title by deed,” Maye said. “For home sales greater than $1 million, the state imposes an additional RTF as well.”
You can see how the rates are calculated here on the state’s website.
The good news for you is that there is a lower rate for senior citizens. Any Realty Transfer Fee (RTF) owed will accompany an Affidavit of Consideration for Use (form RTF-1) at closing.
New Jersey residents selling a home in New Jersey file a NJ GIT/REP-3 Seller’s Residency Certification/Exemption, Maye said.
Filing this form at closing as a New Jersey resident exempts the seller from paying an estimated State of New Jersey income tax at closing, he said.
“For non-resident taxpayers who sell a New Jersey home, they file a different GIT/Rep form and non-resident sellers are required to have State of New Jersey income tax withheld at closing,” Maye said. “The State of New Jersey income tax withheld at closing is either 8.97% of the net gain from the sale or 2% of the consideration.”
That’s the so-called exit tax.
Whether someone has state income taxes withheld at closing comes down to whether you are considered a New Jersey resident or non-New Jersey resident for tax purposes.
Per the instructions from New Jersey Tax Guide “Buying or Selling a Home in New Jersey,” New Jersey residents who sell their homes and move out of New Jersey are considered non-residents for the purpose of the sale, Maye said.
“However, even if money is withheld for New Jersey income taxes at your closing, any money withheld will likely be refunded when you file your income tax return,” Maye said. “For non-residents who have NJ income taxes withheld at their closing, rather than wait to file their tax return, they can file a Form A-3128 to claim an early refund after closing along with proof of overpayment.”
It should be noted that even if someone files a Form A-3128, they still need to complete a New Jersey tax return as the Form A-3128 does not replace the tax return due for that year, Maye said.
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This story was originally published on Dec. 2, 2019.
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.