11 Jul I’m selling my two-family house. What taxes are owed?

Q. I bought my two-family home for $435,000. I put in $275,000 in improvements. I rent 33% of the property and I will sell it for about $750,000. What will be my tax to pay at closing?
— Seller

A. There are a couple of taxes and fees you should be aware of.

Let’s review them.

First, the seller of the home pays a realty transfer fee (RTF) based on the sales price, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

Using the calculator on the New Jersey Realtors website, the RTF on the sale of a $750,000 home would be roughly $6,775, Maye said.

The RTF is required at closing to record the deed., Maye said

Also note the buyer of a home in New Jersey that costs $1 million or more pays the so-called “mansion tax,” based on a percentage of the purchase price, he said.

Sellers may also have to pay an estimated income tax withholding or pre-payment of tax at closing, he said.

“This estimated New Jersey income tax payment has been mislabeled as an `exit tax,’” Maye said. “Just like any income tax withheld, if there is no tax liability, the tax withheld will be refunded by the state of New Jersey.”

The amount withheld is either 2% of the selling price or 8.97% of the profit, whichever is higher, he said.

During the closing process, the appropriate GIT/REP form is prepared depending on the specifics of your situation.

“For example, for New Jersey resident taxpayers, a GIT/REP-3 is prepared and no state taxes are required to be withheld,” he said. “Non-residents who don’t have a qualifying exemption fill out a GIT/REP-1, and state income taxes are withheld.”

If taxes are withheld, it’s important to remember it’s an estimated payment, which will be “trued up” at tax time, Maye said.

Maye said federal income taxes on home sales are not withheld at closing but are part of an individual’s income tax return. The first $500,000 of capital gain is excludable for those who are married filing jointly, or $250,000 is excludable for singles — if certain conditions are met.

New Jersey follows the federal rules for that exemption.

Your situation is a little more complicated because it’s a mixed use property, Maye said.

“As a result, on your return, the transaction needs to be allocated on a pro-rata basis between personal and business,” Maye said. “While a mixed use property may not qualify for the full capital gain exclusion, it might qualify for a partial exclusion.”

Consider working with a qualified tax preparer to make sure you accurately report the sale on your tax returns.

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This story was originally published on July 11, 2022.

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.