13 Oct If we sell our home for $1.2M, what taxes will we owe?

Q. Since COVID, my wife’s and my income has decreased in a major way. We bought our primary residence 11 years ago for $800,000. We owe around $500,000. If we sell in 2022 for $1.2 million, what taxes do we pay? Does it make a difference if we stay in New Jersey or move to another state?
— Selling soon

A. Congrats on making a nice profit on your home.

There are several items to consider to figure out what you may owe in taxes.

You said you have owned your primary residence for 11 years.

Federal law excludes from income tax up to $500,000 of gain realized by a joint filer, or up to $250,000 for a single filer, on the sale of a primary residence as long as it was both owned and used as such for at least two out of the preceding five years, which you clearly meet, said Michael Eagan, director of national tax for CohnReznick in Holmdel.

He said based on a sale price of $1.2 million and an original purchase price of $800,000, you are expecting gain of approximately $400,000 before factoring in both capital improvements and closing costs. That falls within the federal exclusion, he said.

“New Jersey adopts this federal exclusion, so you won’t have any federal or New Jersey income tax liability with respect to the sale,” Eagan said. “The fact that you have a mortgage balance of $500,000 has no bearing on the tax treatment of the sale.”

Eagan said New Jersey treats sellers of New Jersey residences who remain in the state differently than those who move out of state.

“New Jersey considers sellers moving out of state as nonresidents for purposes of the sale, which potentially means that a portion of the sales price or expected gain may be withheld as an advance payment of tax due on the gain, the so-called `exit tax,’” he said. “Because the gain in your case is below the $500,000 exclusion threshold, the full amount — subject to credit against other New Jersey tax liability — would be refundable.”

Take a look at New Jersey’s guide for selling a home, and consider speaking to a qualified tax preparer to make sure you’re making the right — no pun intended — tax moves.

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This story was originally published on Oct. 13, 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.