money

What do we owe in taxes when we sell this home?

Photo: pixabay.com

Q. After retiring a year ago, my husband and I sold our primary residence and moved to our vacation home in South Jersey. We have owned this second property for 25 years. We will be selling this home and purchasing a more year-round friendly home shortly. I believe there is a tax to pay when selling a vacation home, however, we have invested quite a bit in the vacation home, tearing it down and building a larger one. Then we had the damage from Sandy. What counts as the purchase price of this property? Is it the original price, or the original plus all the improvements we made along the years?
— Unsure

A. There are a few considerations here.

First, the cost basis is the sum of the original purchase price, legal costs to acquire the home and improvements made to the home over the year.

You say you tore down the original structure and built a larger home. These demolition costs, plus the costs to rebuild the larger home, are all included in the cost of improvements, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

“One cost you can’t add to the cost of your home is normal maintenance and repairs. If you replaced the roof or painted your home over the years you cannot add these costs to your basis,” he said. “There is one exception to this rule. Any repairs you make to your home in order to sell it are added to your cost basis.”

You say you sold your primary residence and moved into your vacation home a year ago.

You are approximately 12 months into the 24-month requirement to make your vacation home your primary residence for tax purposes, Kiely said.

“The Internal Revenue Code allows for the first $250,000 of gain — $500,000 for a married couple — on the sale of your principal residence to be forgiven,” Kiely said. “The only requirement is that you maintained the home as your primary residence for 24 out of the previous 60 months.”

The 60-month period ends on the day you sold your home.

Kiely said he recommends you stay in your current home until you have satisfied the 24-month rule in order to save federal and New Jersey income taxes on the first $500,000 of gain on your current home.

Good luck to you.

Email your questions to .

This story was originally published on Sept. 20, 2021.

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.