17 Aug Will my mom owe taxes if she sells her home and leaves N.J.?

Q. My mom is 86 years old, and until COVID-19, she was working 20 to 25 hours a week, which helped her afford to pay her property taxes. Now she is collecting unemployment and was recently laid off permanently from her part-time job. She is considering selling her house and moving to live with or near me in North Carolina. What taxes will she face? She earned less than $24,000 but also gets Social Security. The home could sell for $450,000 to $550,000? Is there any way to avoid being taxed to death?
— Tax averse

A. We’re sorry to hear your mom lost her job, but we’re glad she has you to help her.

As we all know, New Jersey is not considered the most tax-friendly state.

And the so-called “exit tax” causes a lot of confusion for home sellers.

“Many believe that this is a tax imposed when you sell property in New Jersey and move out of state, but this is incorrect, said Joseph Sarnecki, a certified financial planner with U.S. Financial Services in Fairfield.

It is not an additional tax, but simply a pre-payment of potential income tax based on the sale of the home, he said.

Specifically, New Jersey requires you to withhold the amount of either 8.97% — New Jersey’s highest tax bracket — of the profit, or 2% percent of the total selling price, whichever is higher, he said.

You said the home could sell between $450,000 and $550,000, but the actual amount of tax that would be owed is based on your mom’s cost basis, which is what she paid for the home, plus any qualifying improvements. The selling price minus the cost basis is the gain, Sarnecki said.

For example, if the house sold for $500,000, the “exit tax” would be 8.97% of the gain, or $10,000 (2% of $500,000), he said.

This is basically an estimated payment of taxes.

“If it turns out the amount was higher than it should have been, mom would receive a refund when filing her New Jersey return,” he said. “This is basically New Jersey’s way of getting you to file a final tax return after leaving the state. It is not an extra tax.”

Sarnecki said there are several exemptions where the tax is not owed at closing, but keep in mind, any taxes on the gains would still be owed when filing her New Jersey return.

“Also, as with the federal tax calculation, she would be entitled to an exclusion amount,” he said. “She may exclude the first $250,000 of gain from the sale of her home and avoid paying taxes on it, as long as it has been her primary residence 2 of the last 5 years.”

The exclusion is doubled to $500,000 if she’s married.

Good luck to you both.

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This story was originally published on Aug. 17, 2020.

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