31 Jul How will the sale of my N.J. home be taxed?

Q. We have a home in Wildwood that we have lived in for four years. It’s under contract for sale. We also have a house in Pennsylvania that our son lives in. We keep our address there. My name and his is on the deed and the mortgage. When we sell the New Jersey house, there will be about a $100,000 gain on the sale. What is my tax liability? The title company says it will withhold 2% of the sales price, which is about $12,500.
— Tax-worried

A. There are several tax issues to consider.

The sale of property located in New Jersey, whether owned by a resident or non- resident of the state, is taxable to New Jersey if you have a gain on the sale, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

He said for federal tax purposes — and for this type of transaction New Jersey follows the federal rules — whether or not you can exclude a portion of all of the gain depends initially on whether or not the home was owned and used as a principal residence for at least two of the five years prior to the sale.

If that is the case, then you can exclude $250,000, or $500,000 if filing married jointly, of the gain.

Hook said in your situation, the ownership requirement of living in the home for two of the past five years has been met.

The issue is whether the home has been used as your principal residence.

“If you keep your address in Pennsylvania, then I will assume that you have not been filing New Jersey income tax returns,” Hook said. “If that is the case, it would be difficult to try to say your permanent residence is New Jersey and exclude any of the gain.”

Further, he said, the fact that the title company withheld 2% of the sales price indicates that the title company also believed that you were a New Jersey non-resident because there is no requirement to withhold any tax from the sale of property for someone who is a New Jersey resident.

Based on all of this, the entire $100,000 gain would be subject to income tax for both federal and New Jersey tax purposes, Hook said.

“The good news is that for federal tax purposes, the gain would be subject to capital gains tax rates which are lower than federal ordinary income tax rates,” Hook said. “New Jersey does not have a different tax rate for capital gains so the entire $100,000 would be subject to New Jersey income tax rates on ordinary income.”

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This story was originally published on July 31, 2020.

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