04 Nov If we sell our home for $1.4 million, what’s our capital gain?

Q. If we sell our home for $1.4 million and have a $600,000 mortgage and we put in $200,0000 if improvements, what is our capital gain? Do we get a pass through if we immediately put the money in another property? What if we want to move out of state? We are 64 and 66.
— Sellers

A. We’re glad you want to be informed before you sell your home.

When you sell a home in New Jersey, you are required to pay taxes on the taxable gain, whether the home was a principal residence, second home or investment property.

To calculate the capital gain, you first need to know your home’s adjusted basis, which is defined as what you paid for the home plus the cost of any capital improvements — not repairs — that you’ve made, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

For example, if you paid $700,000 for your home and spent the $200,000 upgrading your kitchen and bathrooms, then your adjusted basis is $900,000, he said.

Next, you’ll calculate the net proceeds from the sale of your home.

Net proceeds are the sale price minus the cost of the sale, he said.

Therefore, if the selling price was $1.4 million and the cost to sell — commissions, legal fees, realty transfer fees, escrow fees, inspections, and other fees associated with the sale of the property — was $100,000, net proceeds would be $1.3 million, DeFelice said.

In this example, your capital gain is $400,000, which is net proceeds of $1.3 million minus the home’s adjusted basis of $900,000, he said.

It’s important to know that if the property was used as a principal residence in two of the last five years, you will qualify under Section 121 of the Internal Revenue Code. This excludes up to $500,000 of the gain for married taxpayers, or $250,000 for single taxpayers, DeFelice said.

So if you qualify for the exemption under this example, as a married couple, you would owe no tax on the $400,000 capital gain, he said.

If your capital gains are more than the $500,000 exclusion amount, you would pay tax both at the federal and New Jersey state level, he said.

For federal, the remaining amount of gains will get taxed at 0%, 15%, or 20% depending on your income and filing status, he said.

“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.”

At the state level, New Jersey taxes capital gains as ordinary income, with rates that range from 1.4 to 10.75 percent, DeFelice said, noting that the 10.75% rate only applies once your taxable income exceeds $5 million.

“And from a tax standpoint neither your ages nor what state you relocate to will make any difference in the rules here,” he said.

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This story was originally published on Nov. 4, 2021.

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