17 Nov How is income from a home sale taxed in N.J.?

Q. A past article said on capital gains tax when you sell a home: “For federal, the remaining amount of gains will get taxed at 0%, 15%, or 20% depending on your income and filing status. For 2021, you are in the 0% rate if you’re income with income of less than $40,400 or married filing jointly with income of less than $80,800,” he said. “The 15% bracket is for single filers who have income between $40,401 and $445,850, and for married people it’s from $80,801 to $501,600. Those with income above those levels will be in the 20% bracket.” Does the income that determines your capital gains tax rate include the actual gain itself? If I am married filing jointly with income of $30,000 and a real estate capital gain of $1 million — so $500,000 taxable — would my capital gains tax rate be 0% (for $30K income) or 20% (for $530,000 income)?
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A. Thanks for your question.

There are a few tax items to consider here.

First, if you sell a house or property that you have owned for less than one year, it is considered a short-term capital gain and taxed as ordinary income, Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

If you owned it for longer than a year, it is considered a long-term capital gain, which gets taxed on the federal level at 0%, 15% or 25%, depending on your income bracket, DeFelice said.

“The amount of the actual gain does not count towards determining what ordinary income bracket you fall into,” he said. “Only things like income from earnings, pensions, retirement account distributions, qualified dividends, interest income and Social Security count as ordinary income.”

DeFelice said capital gains from the sale of a home or appreciated stock in taxable accounts do not get added in.

So in your example, if $30,000 was your total ordinary income — married filing jointly — the $1 million capital gain after the $500,000 exemption would be taxed at the 0% federal bracket as it does not count as ordinary income, he said.

But, DeFelice said, you would probably still owe on the state level.

“For example, New Jersey taxes capital gains as ordinary income, with rates that range from 1.4% to 10.75%,” he said. “However, the 10.75% rate only applies once your taxable income exceeds $5 million.”

You should check with a tax preparer who can look at your personal situation and advise.

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This story was originally published on Nov. 17, 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.