How can I reduce tax liability on this home sale?


Q. I bought a house in New Jersey in 2000 and lived in it as my primary residence until 2008 when I moved to Pennsylvania. I rented out the New Jersey house for the next 12 years — it was under water during the 2008 crash. I recently sold the property and the 2% estimated income tax was collected. I know I don’t meet the requirement for having lived in it as my primary residence for two of the last five years but is there anything that would reduce my income tax liability on the sale when I file my non-resident return?
— Seller

A. Congrats on the home sale.

There are several ways you may be able to lower the tax bill.

It’s possible that you generated a gain on the sale, including the depreciation expense that would have been claimed for the 12 years that the New Jersey house was rented, which reduces the cost basis of the house, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.

But it is possible, he said, that you incurred a loss on the sale and were subject to the 2% withholding requirement on gross sales proceeds, If that happened, you will merely have to file a 2021 New Jersey nonresident income tax return and claim a credit for the tax withheld that will be refunded, Becourtney said.

All the various closing costs – including realtor commissions, transfer taxes, and attorney fees – are added to the cost and thus reduce any gain, she said.

“All capital improvements made since acquiring the house in 2000 are added to the cost. Capital improvements made during the years that the house was rented should have been depreciated over time,” he said.

You may find IRS Publication 523, “Selling Your Home,” useful in connection with the sale.

“Any New Jersey nonresident tax on the sale will give rise to a resident credit against your Pennsylvania resident income tax liability, keeping in mind that the New Jersey tax rates are often higher than Pennsylvania’s flat 3.07% tax rate, which means you likely won’t get a full credit for taxes paid to New Jersey,” Becourtney said.

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This story was originally published on June 23, 2021. 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.