When we sell our house, will we owe the exit tax?
Q. My husband and I are selling our house here in New Jersey. We bought the property in 2013 and have lived in the house since. I will be staying in New Jersey with my daughter for the school year, with my parents after the house is sold, while my husband moves to Florida and stays with his parents. We bought the house for $ 209,000, have a mortgage for $ 185,000 and will post it for $ 500,000. When we do our 2021 taxes, I will still be residing in New Jersey. Do we have to pay the exit tax or are we exempt? We will end up buying in Florida.
A. It will be an interesting year for you as you live in different states.
Before we get to the exit tax, which is not an additional tax but an estimated tax payment that New Jersey charges on certain home sales, let’s talk about capital gains.
One of the more favorable provisions of the Internal Revenue Code is the exclusion of gain on the sale of a principal residence – up to $ 250,000 for all taxpayers and up to $ 500,000 for filers. spouses, said Neil Becourtney, chartered accountant and tax partner with CohnReznick at Holmdel. New Jersey follows federal rules.
A joint filer has the right to exclude up to $ 500,000 of gain realized on the sale of a primary residence as long as the taxpayer meets a property test and a residency test, he said. .
“The ownership requirement is that the taxpayer has owned the house for at least 24 months in the last five years before the date of sale,” he said. “For a married couple filing jointly, only one of the spouses must meet the ownership requirement.”
The residency requirement is that the taxpayer owned the house and used it as their primary residence for at least 24 months within the previous five years. For this test, each spouse must meet the residency requirement individually for the joint registrant to qualify for the full exclusion, Becourtney said.
Before closing costs and disregarding capital improvements, you expect a gain of $ 291,000 from the sale of your New Jersey home. You and your husband have lived in this residence for over seven years. If you sell it within three years of your husband moving to Florida, you’ll be eligible to exclude all of your gain from federal and New Jersey income tax, Becourtney said.
Now let’s move on to the so-called exit tax.
When a non-resident of New Jersey sells their home, the law requires a prepayment of tax equal to the greater of 2% of the sale price or 10.75% – the higher tax rate – of the taxable gain realized, Becourtney said.
The state considers New Jersey residents who sell their New Jersey home and move out of state to be non-residents for the purpose of the sale, he said.
“So in your situation, a payment of $ 10,000 of estimated New Jersey tax should be required for the closing to take place,” he said. “Your lawyer will need to prepare some tax forms required in this situation. This tax payment will be claimed on your gross New Jersey 2021 income tax return. ”
Good luck with the moves.
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Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly electronic newsletter.