Tax Requirements for NJ Homeowners Making a Sale
Go Over the Different Taxes that Home Sellers Pay in Manahawkin, Jackson, Point Pleasant, Toms River, and other Ocean and Monmouth County towns
If you sell a house in New Jersey, you should be aware of the taxes you may have to pay. The tax amounts depend on your residency status, meaning whether you reside year-round, part-time, or outside New Jersey, and other factors. Your marital status also affects the taxes you pay at the close of your sale and for the tax year. Aside from a qualified tax accountant, you may want an experienced real estate lawyer to help you understand the best way to avoid or pay the least taxes on your property sale before you close.
Contact The Bronzino Law Firm to speak with a seasoned real estate attorney who can answer your questions about the process of buying or selling your home. We provide dedicated representation for buyers and sellers all over Ocean and Monmouth County, such as Eatontown, Middletown, Lavallette, Brick, Ocean Township, and surrounding communities. Our firm is pleased to provide free consultations, so call (732) 812-3102 today for the guidance you need.
Special Tax Considerations When Selling a Property in New Jersey
Capital Gains Tax
The first consideration is the capital gains tax. You pay federal and state taxes on home sale profits, which starts with establishing a tax basis. The difference between the price you originally paid for your home and the price the buyer pays when you sell it is the starting point for a tax basis. Added to the calculation are all capital or permanent improvements you made to the home between purchase and sale. So, if you renovated the house with a room addition, the cost of that home improvement is added to your original purchase price basis. For example, if you purchased your home for $250,000.00 and added $50,000.00 worth of improvements (not mere repairs), the adjusted basis is $300,000.00. Now, if you sold your home for $400,000.00, your gains are $100,000.00.
Fortunately, the state tax rules allow for an exemption on capital gains of up to $250,000.00 of what you sold your house for if you are a taxpayer filing as a single person and up to $500,000.00 if you file as married. So, if you are single, your capital gains taxable amount is $50,000.00. The capital gains for the amount over the exemption amount are taxable at 2% of the total purchase price or 8.97% of the gain, whichever is higher. In the case of a $400,000.00 sale price and a $50,000.00 gain, you would pay the higher tax, which is 2% of the sale price or $8,000.00.
Exemptions and Rules in Tax Policies
Exemption rules have exceptions and qualifications, however. For example, you pay no federal or state taxes for selling a home you have lived in since 1992. In addition, you max out your exemption every two years. So, if you sell two houses in two years, you cannot claim the exemptions for both. Third, you do not qualify for the exemption if you exchanged your home for something of value or if you are subject to an ex-patriate tax. Those who give up their U.S. residency pay an ex-patriate tax on a home sale. Finally, you qualify for the exemption if you owned and lived in your home as a primary residence for two out of the five years before the sale.
Residency Status and the Forms to Complete
The state will know your residency status when you file the appropriate forms at the close of your sale. At or before your house sale closes, you file your GIT/REP form to settle with the state and pay your capital gains taxes based on your declared residency status, among other details. The GIT/REP forms establish whether estimated taxes are payable. Form 1 is for nonresidents, 2 is the nonresident tax prepayment receipt, 3 is the seller’s residency certification, and 4 is a waiver form to relieve the seller from having to file the GIT/REP form and payment.
Resident and Nonresident Using the GIT/REP-3 Form to Claim Exemptions
If you are a New Jersey resident, you file a GIT/REP-3 form at sale closing to get your exemption from paying estimated sale taxes. Instead, you wait until you file your state income tax return and report gains. But even nonresidents may check the “Seller’s Assurances” in a residency certification form or a GIT/REP-3, to claim exemptions. So, when your property was your principal residence for two of the five years before the sale, and the payment or other consideration for your property is not over $1,000.00, you offset your single or married exemptions against capital gains taxes and avoid the prepayment. For example, a short sale returns the property to the mortgage holder so that it would qualify for the gains exemption.
Exit Tax and its Main Purpose in New Jersey
New Jersey came up with the exit tax to prevent sellers from moving out of state without paying their taxes. Thus, your status is vital in quantifying the exit tax. This tax targets the seller who plans to leave the state without paying capital gains taxes, but all sellers are subject to the tax. It is not another tax but a prepayment of your estimated taxes on the sale of your property. Sale taxes are due on or before the closing at the standard tax rate (2% or 8.97%) on the capital gains after deducting any exemptions. The prepayment is offset against any state taxes you pay when you file your annual taxes. So, even if you are not leaving the state, you may be subject to prepaying capital gains taxes on the sale of your home in advance of the regular tax filing deadline.
Factoring Home Sale Tax Payments into Your End-of-the-Year Taxes
Once you file your end-of-the-year taxes, the prepayment figures into your taxes due or owed to you. So, if you qualify for the gains exclusion, you pay no sales taxes, and the state refunds you the prepayment. And if you have any excess gains from the sale that is not deductible, it is taxed at your income tax rate or your tax bracket for state purposes. That rate depends on your annual income and filing status. Non-exempt gains are taxed federally at 0%, 15%, or 20%, depending on your ordinary income. This tax is in addition to your state tax, which ranges from 1.4% to 10.75%.
If you move out of state, you can file your return as a nonresident and get a quick refund if you made an overpayment at your sale closing. So, even if you made no profit on your home sale, you still must prepay taxes at 2% of the sale price and then wait for the refund after you file your taxes. And regardless of your status, all sellers pay additional taxes aside from capital gains.
Realty Transfer Fee and the Mansion Tax
Other taxes tied to home sales are the realty transfer fee of 1% of the sale price unless you transfer property to family members or have other exemptions. For example, if the sale proceeds are less than $100.00, you are a senior citizen, blind or disabled, or living in low-income housing, the transfer tax is lower or zero. Also, mansion taxes are .04% of the purchase price for real estate worth over one million dollars, paid by either buyer or seller. For sales over $1,000,000.00, the seller typically pays the mansion tax, and the buyer pays 1% for the realty transfer fees.
Get Further Real Estate Legal Guidance to Prepare for Your Home Sale at the Jersey Shore
Special home sales taxes can be confusing and expensive without proper planning and advice. Before selling your home, consult a real estate attorney at The Bronzino Law Firm, who can prepare you for the timing and payment of taxes. Attorney Peter J. Bronzino and our talented team can also help you with the numerous documents that the state requires upon sale, concerns related to specific types of properties such as beach houses, homes in over 55 communities, and multi-family homes. We have a background assisting clients throughout Wall, Sea Girt, Bay Head, Lakewood, Toms River, Stafford, Beachwood, Holmdel, Manchester, and other communities in Monmouth and Ocean County. Contact (732) 812-3102 today or fill out our online contact form.