30 Jun How much in tax is due when we sell our vacation home?
Q. We have lived in New Zealand for the past 18 years and we want to sell our New Jersey vacation home, which we have owned for 25 years. My wife is an American citizen and files tax returns each year, while I am not and I don’t file. The property was rented out as summer rentals each year but never made a profit. It was never our primary residence. The property is held jointly in both our names. How would we go about paying the taxes on the sale and what would they be?
A. The real estate market is still pretty hot, even with mortgage rates moving higher.
How a real estate sale is taxed depends in part on whether the property was a primary home or a vacation or second home.
When you sell real estate that has been used for rental purposes or has not been your primary residence for two of the past five years, the transaction is taxable at both the federal and state levels, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.
“To ensure they get paid, both the IRS and State of New Jersey require payment be withheld at closing,” Karu said. “The tax is calculated based on the net profit on the sale.”
You would calculate the net profit on the sale by accounting for expenses, such as capital improvements, costs for a real estate agent and closing attorney and other items.
Given that your wife is a U.S. citizen and she will be filing tax returns, she would include the sale and the withholding taxes on her federal return, Karu said. For New Jersey, she would have to file a non-resident return to report the transaction, he said.
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This story was originally published on June 30, 2022.
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