Selling a home is a major financial decision that can have significant tax implications. New Jersey, like many states, has its own set of rules and regulations regarding the taxation of real estate transactions. If you’re considering selling your home in New Jersey in 2023, it’s important to understand the potential tax implications so that you can plan accordingly.
Do You Pay Capital Gains Tax When Selling a Home in New Jersey?
When selling a home for a higher price than the initial purchase price, you realize a capital gain on the sale. Both the federal and state governments subject capital gains to taxation.
New Jersey does not have a separate capital gains tax. According to the New Jersey Division of Taxation, all capital gains realized in the state are taxed as income using the individual income tax schedule.
The 3 Levels of New Jersey Taxes on Real Estate
As with most other states, selling real estate property subjects you to multiple tax layers. In New Jersey, home sellers can expect to pay three tax types: federal capital gains taxes, state income taxes, and state transfer taxes.
Federal Capital Gains Taxes
Rate: Varies from 0% to 20%, depending on the taxpayer’s situation. The most common rate is 15%.
When selling real estate in New Jersey, you must pay federal capital gains taxes if you realize any gains on the sale.
The IRS defines two types of capital gains: short-term and long-term. It is considered a short-term capital gain if you have owned the property for one year or less before selling it. If you’ve held it for over a year, it is a long-term capital gain instead.
Short-term capital gains are taxed as ordinary income, meaning the tax brackets for this type of gain are identical to those for standard federal income taxes.
Long-term capital gains tax brackets are calculated based on the seller’s filing status and income levels:
- 0% for taxpayers meeting the following conditions:
- The taxpayer’s filing status is “Single” or “Married Filing Separately” and their taxable income of $41,675 or less
- The taxpayer’s filing status is “Married Filing Jointly” or “Qualifying Surviving Spouse,” and their taxable income of $83,350 or less
- The taxpayer’s filing status is “Head of Household” and their taxable income of $55,800 or less
- 15% for taxpayers meeting the following conditions:
- The taxpayer’s filing status is “Single,” and their taxable income is over $41,675 but $459,750 or less
- The taxpayer’s filing status is “Married Filing Jointly” or “Qualifying Surviving Spouse,” and their taxable income is over $83,350 but $517,200 or less
- The taxpayer’s filing status is “Married Filing Separately,” and their taxable income is over $41,675 but $258,600 or less
- The taxpayer’s filing status is “Head of Household,” and their taxable income is over $55,800 but $488,500 or less
- 20% for taxpayers exceeding the maximum thresholds outlined for each respective filing status in the 15% category (e.g., taxpayer filing as single and earning over $459,750)
Paragraph 121 of the Internal Revenue Code (IRC) outlines exceptions to long-term capital gains taxes. Sellers can exclude up to $250,000 (or $500,000 for married couples filing jointly) on the gains realized following the sale of their home if they pass the “ownership and use tests.” You qualify for this exclusion if:
- The house sold was your primary residence
- You owned the home for two years or more
- You lived in the home and used it as your primary address for two years or more
How is the Federal Capital Gains Tax Calculated?
According to the National Association of Realtors, the median period of homeownership in the United States is 13 years. While the exact duration varies by area, it typically falls between 6 and 21 years. These stats show that most individuals selling a home in the United States will pay long-term federal capital gains taxes.
Example: Alexander is married but filing taxes separately from his spouse Maria. His annual income is $200,000. The couple live in a Camden, NJ condo that Alexander purchased ten years ago for $195,000. Despite the length of homeownership, Alexander and Maria have only used the condo as their primary residence in the past five years. When Alexander sold the condo, the final purchase price negotiated was $315,000, meaning he realized a capital gain of $120,000. Because he owned the home for over a year, it is categorized as a long-term capital gain.
Alexander’s income level and filing status place him in the 15% tax bracket. Under ordinary circumstances, he would owe $18,000 in federal capital gains taxes after selling the condo. However, Alexander can benefit from the exemption for selling primary homes outlined in IRC Paragraph 121 because he passes the ownership and use tests. As he is married but filing separately, the exemption allows him to exclude up to $250,000 of capital gains from the federal tax. Consequently, Alexander can exclude all $120,000 of his capital gain from federal taxation.
New Jersey State Capital Gains Tax
Rate: 1.40% – 10.75%
New Jersey taxes capital gains realized within the state’s boundaries as income. They are included in the taxpayer’s individual income. New Jersey uses a multi-tiered progressive income tax schedule, with standard tax rates ranging from 1.40% to 10.75%, depending on income level and filing status.
New Jersey legislation offers a state-level exemption to the sale of primary residences similar to its federal equivalent in IRC Paragraph 121. According to the NJ Division of Taxation, single filers may exclude up to $250,000 from state capital gains taxes. Married taxpayers filing jointly can exclude up to $500,000. The criteria are the same as the federal ownership and use tests: the property must have been owned and used as a primary residence for two of the five years before the sale.
How is the New Jersey State Capital Gains Tax Calculated?
New Jersey does not have a separate capital gains tax; instead, capital gains are taxed as regular income in the state. When you sell a home and have capital gains, they are subject to New Jersey’s income tax rates. Here’s a general outline of how the process works:
1. Calculate your capital gain: Capital gain is the difference between the selling price of your home and its adjusted cost basis (purchase price plus any improvements and minus any depreciation). It is what you owe based on profit from the sale.
2. Determine if you qualify for the federal exclusion: If the home you’re selling is your primary residence and you meet the eligibility criteria (owned and used as your primary residence for at least two of the five years preceding the sale), you may be able to exclude up to $250,000 of capital gains for single taxpayers or $500,000 for married taxpayers filing jointly from federal taxation.
3. Apply the federal exclusion to your New Jersey taxable income: New Jersey recognizes the federal capital gains tax exclusion. If you qualify for the federal exclusion, you can also exclude the same amount from your New Jersey taxable income.
4. Calculate your New Jersey taxable income: Subtract the excluded capital gains from your total income to determine your taxable income in New Jersey.
5. Apply New Jersey income tax rates: New Jersey income tax system rates range from 1.4% to 10.75%. Apply the appropriate tax rate to your taxable income to calculate your New Jersey income tax liability.
Example: Alexander is married and filing separately with an annual income is $200,000. This specific combination of income level and filing status normally places him in the 6.37% tax bracket, for which he would owe 6.37% of $200,000 minus $2,126.25, or $10,613.75.
When Alexander realized a $120,000 capital gain on the sale of his Camden, NJ condo, his income was considered to have increased by the same amount. Under typical circumstances, Alexander would pay income taxes as if his income this year had been $320,000. While Alexander would have remained in the same tax bracket, the sale would have increased his tax liability to 6.37% of $320,000 minus $2,126.25, or $18,257.75.
The condo was Alexander’s primary residence for all five of the past five years prior to the sale, meaning he passes the ownership and use tests and qualifies for the state-level capital gains exemption. The maximum threshold for his filing status is $250,000. Because the total capital gain is under that limit, Alexander can exclude all of his gains from state taxation, meaning he only pays income taxes on his standard annual income.
New Jersey Transfer Taxes
Rate: $0.50 per $500 (0.1%) – $6.05 per $500 (1.21%)
When selling a home in New Jersey, the seller must pay the Realty Transfer Fee (RTF). New Jersey taxes all property transfers within the state’s boundaries at different rates depending on various factors, such as whether the property transfer is for new constructions or qualifies as Low and Moderate Income Housing and whether the property is being transferred to a senior citizen, a blind or disabled person.
Below is a breakdown of the different Realty Transfer Fee rates:
- Standard transfers with a total consideration not exceeding $350,000: $2.00 per $500 (0.4%) to $3.90 per $500 (0.78%)
- Standard transfers with a total consideration exceeding $350,000: $2.90 per $500 (0.58%) to $6.05 per $500 (1.21%)
- Transfers to senior citizens, blind or disabled persons, or transfers of Low and Moderate Income Housing with a total consideration not exceeding $350,000: $0.50 per $500 (0.1%) to $1.25 per $500 (0.25%)
- Transfers to senior citizens, blind or disabled persons, or transfers of Low and Moderate Income Housing with a total consideration exceeding $350,000: $1.40 per $500 (0.28%) to $1.25 per $500 (0.68%)
New Jersey may supplement the Realty Transfer Fee with additional fees if the total consideration amount exceeds $1,000,000 and the property matches specific criteria.
- RTF Supplemental Fee (Mansion Tax): An additional fee, sometimes referred to as the mansion tax, may be imposed if the land conveyed in the transfer is Class 2 residential, Class 3A farm properties with at least one building suitable for residential use, Class 4A commercial other than industrial or apartment, or Class 4C cooperative units. The supplemental fee equals 1% of the total consideration amount and is the buyer’s responsibility.
- Controlling Interest Transfer Tax (CITT): New Jersey may tax specific transfers of a controlling interest of property classified as Class 4A commercial units. If the transfer was executed in an entity that either directly or indirectly owns specific types of real property, the buyer owes the CITT. This fee is equal to 1% of the transfer’s total consideration amount. According to the NJ Division of Taxation website, the buyer is exempt from paying the CITT if they pay the RTF supplemental fee.
How is the New Jersey State Transfer Tax Calculated?
All property transfers in New Jersey are subject to the Realty Transfer Fee (RTF). To calculate how much parties of a property transfer may owe, determine which RTF schedule the property falls into by verifying the total consideration amount, whether the property is being transferred to a senior citizen or a blind or disabled person, and whether the property qualifies as Low and Moderate Income Housing.
If the total consideration amount exceeds $1,000,000, you must also check whether the property meets the conditions for the RTF supplemental fee or the CITT.
Example: When Alexander sold his Camden, NJ condo for $315,000, the recipient was not a senior citizen, blind, or disabled person. The condo also does not qualify as Low and Moderate Income Housing, and the total consideration amount did not exceed $1,000,000. Consequently, this is a standard transfer not subject to the mansion tax or the RTF supplemental fee.
The property’s total consideration amount is $315,000, meaning it falls into the “Total consideration not over $350,000” category, and the over $200,000 bracket within that category. Consequently, the Realty Transfer Fee for this house sale is $3.90 per $500, and Alexander owes $2,457 in transfer fees.
New Jersey Exemptions and Deductions for Real Estate Taxes
Homeowners planning to sell their house, condo, or apartment in New Jersey may benefit from exemptions and deductions in specific circumstances.
New Jersey Capital Gains Exemptions
New Jersey taxes capital gains realized in the state as income through the individual income tax schedule. Consequently, there are no exemptions to paying taxes on capital gains in New Jersey. You may benefit from state-level personal and dependent-related income tax exemptions to help reduce your income tax burden.
New Jersey Transfer Tax Exemptions
According to the New Jersey Division of Taxation and New Jersey legislation (NJ Revised Statutes 46:15-10), the following situations and transfers are exempt from the Realty Transfer Fee:
1. Low-Value Considerations
Property transfers with a consideration amount of less than $100 are exempt from the Realty Transfer Fee.
2. Transfers To and From Government Entities
Transfers of New Jersey property are exempt from the Realty Transfer Fee if transferred to or from the United States, the state of New Jersey, or any agency, political subdivision, or instrumentality of the federal and state governments.
3. Transfers Due to Debt
Transfers executed solely to provide or release security for a debt or another obligation are exempt from the RTF.
4. Tax Delinquent Property
Properties sold or transferred for delinquent taxes and assessment are exempt from the Realty Transfer Fee.
5. Partition Transfers
Properties transferred due to a partition, such as the division of a house between two co-owners, are not subject to the Transfer Fee.
6. Liquidations, Bankruptcy, and Credit
Property transfers by the receiver or trustee in a bankruptcy or liquidation or the assignee for the benefit of creditors are exempted from the Realty Transfer Fee.
7. Ancient Deeds
Transfers of property that are eligible for recording as an ancient deed are exempt from the RTF.
8. Old Property
Any property acknowledged or proved on or before July 3, 1968, is exempt from the Realty Transfer Fee.
9. Transfers Between Family Members
When transferring a property to a husband, wife, parent, or child, the seller is exempt from paying the Realty Transfer Fee.
10. Cemetery Land
Property transfers conveying cemetery lots or land plots are exempt from the RTF.
11. Court Orders
New Jersey law states that property transfers “in specific performance of a final judgment,” such as a court order from a judge, are exempted from the Realty Transfer Fee.
12. Reversion Rights
Property transfers executed due to the release of a right of reversion are exempted from the Realty Transfer Fee.
13. Already Recorded Deeds
A property transfer in New Jersey may be exempted from the RTF if the deed for this property was already recorded in another county and the RTF was already paid or accounted for in full.
14. Transfers Due to Wills
Property transfers from executors or administrators to a deceased person or heir are exempt from the RTF if the transfer is executed per the deceased person’s will or the state’s intestate laws, as applicable.
15. Transfers Following Divorces
Transfers of property recorded are exempted from the RTF if executed within 90 days of a divorce decree dissolving a marriage between the grantor and grantee.
16. Transfers Issued By Cooperative Corporations
A property transfer issued by a cooperative corporation (co-op) may be exempt from the RTF if it meets these conditions:
- The transfer is part of a conversion of the co-op’s assets into a condominium to a shareholder
- The transfer is executed following that shareholder surrendering all of their stock in the co-op and the proprietary lease entitling them to exclusive occupancy to part of the property owned by the co-op
17. Inter-Company Transfers
Transfers of property between combined group members within the same company are exempt from the RTF if the property was entered into on and after January 1, 2021.
New Jersey Real Estate Taxes vs. Other States
New Jersey’s complex real estate taxation laws place it among the most expensive states for selling real property. Below is a breakdown of real estate taxes in similar states and how they compare with New Jersey.
Michigan
Michigan’s real estate tax laws are among the more permissive in the United States.
Capital Gains Tax Rate: 4.05% for Tax Year 2023, 4.25% for Tax Year 2022
Michigan taxes all capital gains realized in the state as income, subjecting them to the standard individual income tax schedule. The individual income tax rate in Michigan is flat, meaning it effectively has only one bracket.
Since the passage of the Income Tax Act, the rate has been reduced from 4.25% to 4.05%, effective January 1, 2023. Consequently, any capital gains realized in the state are subject to this rate.
Transfer Tax Rate: $3.75 per $500 (0.75%) state + $0.55 per $500 (0.11%) county
In addition to taxing capital gains as income, the Michigan Department of Treasury also levies the State Real Estate Transfer Tax (SRETT) on all transfers of property within the state’s borders from one party to another.
The SRETT tax rate is $3.75 for every $500 or fraction thereof in the consideration, equivalent to about 0.75%. The seller usually is responsible for paying the transfer tax unless the parties to the sale agree to a different arrangement.
In addition to the state-level transfer tax, each of the 83 counties in Michigan is authorized to levy an additional county-level transfer tax. The county-level transfer tax rate is the same in every Michigan county, at $0.55 per $500.
Virginia
Virginia’s real estate taxation schedule is near the national average.
Capital Gains Tax Rate: 2% – 5.75%
Virginia treats capital gains realized in the state as individual income. According to the Virginia Department of Taxation, four tax brackets apply:
- If the total Virginia taxable income is $3,000 or less, the state income tax is 2%.
- If the total Virginia taxable income is over $3,000 but $5,000 or less, the state income tax is $60 + 3% of the excess over $3,000.
- If the total Virginia taxable income is over $5,000 but $17,000 or less, the state income tax is $120 + 5% of the excess over $5,000.
- If the total Virginia taxable income is over $17,000, the state income tax is $720 + 5.75% of the excess over $17,000.
Transfer Tax Rate: 0.25%
Virginia levies the State Recordation Tax on all property transfers within the Commonwealth, except as exempted by law. According to the Code of Virginia, the State Recordation Tax is $0.25 for every $100 or a fraction thereof in the consideration amount (VA Code 58.1-801).
Washington
Capital Gains Tax Rate: 0%
The state government specifically exempts real estate from capital gains taxes, meaning that selling a house in the Evergreen State does not require paying this tax, nor is it treated as income.
Transfer Tax Rate: 1.10% – 3% state + 0.25% – 2% local
The Washington state government levies the Real Estate Excise Tax (REET) on the sale of real property within the state’s borders. Payment of the REET is generally the seller’s responsibility unless they are otherwise exempt. The REET is divided into two parts: a state-level tax and local taxes.
State REET rates:
- 1.10% for property with a total consideration of $525,000 or less
- 1.28% for property with a consideration amount between $525,000.01 and $1,525,000
- 2.75% for property with a consideration amount between $1,525,000.01 and $3,025,000
- 3% for property with a consideration amount over $3,025,000
- Local REET rates vary by county and municipality, ranging from 0.25% to 2%.
When Do You Pay Capital Gains Tax on New Jersey Real Estate?
You realize a capital gain when you sell a property for a higher price than the amount you initially paid to acquire it. Capital gains in New Jersey are taxed as income, meaning New Jersey residents must report their gains when filing their state income tax returns using Form NJ-1040.
For Tax Year 2022, the filing deadline was April 18, 2023. Taxpayers who applied for an extension have until October 16, 2023, to report income, including capital gains.
Short-Term vs. Long-Term Capital Gains Tax Rate in New Jersey
According to the IRS, a capital gain is considered long-term if you sell a capital asset after owning it for over one year and short-term if you owned it for a year or less before selling it. Short-term and long-term capital gains are taxed differently at the federal level.
At the state level, according to the NJ Division of Taxation, the state government makes no difference between short-term and long-term capital gains. New Jersey taxes both at the state level through its income tax schedule.
How to Avoid Capital Gains Taxes on Home Sale in New Jersey
New Jersey taxpayers can use multiple strategies to reduce or avoid paying capital gains on the sale of a home, apartment, or condo.
Strategy #1: Federal Exclusion of Long-Term Capital Gains
According to the IRS, you can exclude up to $250,000 (or $500,000 if married and filing jointly) of the gains realized from the sale of a home, provided the home was your primary residence. You can prove your home was a primary residence by passing the ownership and use tests, which require you to pass the following:
- Ownership test: You have owned the home for at least two years before the sale. Documents such as a deed and title insurance may constitute valid proofs of ownership.
- Use test: You must show proof of occupancy, meaning you have lived in the home and used it as your primary residence for at least two years before the sale. Documents used to prove occupancy are outlined in federal proof of occupancy guidelines.
Although it is not required for the ownership and usage periods to be consecutive, you must be able to prove both ownership and use of the home within five years of the sale. Additionally, you must not have used this exclusion for another home in the last two years.
Example: Gabriel is a single taxpayer living in Morristown, NJ, earning $350,000 annually. He owned and used a single-family home in the city as his primary residence for the past three years before selling it. He initially purchased the home for $400,000, then sold it for $515,000, realizing a $115,000 long-term capital gain.
Normally, Gabriel would have to pay the federal capital gains tax on the sale of his property. However, the property was a primary home, for which he met the ownership and use tests. Gabriel qualifies for the federal exclusion of long-term capital gains. His filing status allows him to exclude up to $250,000 from the federal tax, letting him exclude the entirety of his $115,000 capital gain and avoid paying the federal capital gains tax on the sale of his home.
Strategy #2: State Exclusion of Capital Gains
According to the New Jersey Division of Taxation, the state provides residents with a state-level exclusion of capital gains on the sale of a primary residence. This exemption allows married taxpayers filing jointly to exclude up to $500,000 from income taxation and single filers to exclude up to $250,000.
The criteria required to benefit from this exemption are similar to its federal equivalent: the home must have been a primary residence, and the seller must have owned and lived at the home’s address for at least two of the five years prior to the sale.
Example: Gabriel owned his Morristown, NJ home for three years and used it as his primary address for two years before the sale. Gabriel passes the ownership and use tests, allowing him to benefit from the state-level exclusion of capital gains from his income taxes. As a taxpayer filing as single, he can exclude up to $250,000 of capital gains. However, his total capital gain was $115,000, allowing him to exclude 100% of the gains he realized from state-level taxation.
How to Report Your Property Sale for Taxes in New Jersey
If you have sold a property in New Jersey, you must report the sale on your state and federal tax returns.
IRS Forms
You must report the sale of your New Jersey home to the IRS. To do so, you must complete and submit two forms: IRS Schedule D (Form 1040) and IRS Form 8949.
Form 8949 requires you to report whether your gains are long-term or short-term. Short-term gains must be listed under Part I, whereas long-term gains must be listed in Part II. If you can exclude the gains you’ve realized with a specific property, enter the letter code “H” in column (f) on the line corresponding to that property, then write the corresponding adjustment amount in parentheses and as a negative in column (g).
After completing Form 8949, enter the corresponding information regarding short-term and long-term gains in IRS Schedule D (Form 1040). Part I lets you enter short-term gains, whereas Part II is for long-term gains.
Michigan Department of Treasury Tax Forms
If you realized a capital gain in New Jersey during the tax year, you must report it to the New Jersey Division of Taxation in your state income tax forms. Complete and submit a Form NJ-1040 to report your income to the state government. Section 19 of the form, “Net gains or income from disposition of property,” allows you to report the amount of capital gains realized during the year.
You must also report all capital gains and losses on Schedule NJ-DOP. Complete this form and submit it with Form NJ-1040 to report your property sales to the state of New Jersey.
Ensure you keep a copy of your tax returns and supporting documents for at least three years in case of an audit. If you have questions or are unsure how to report the sale on your tax return, consult a tax professional.
FAQs
Here are the answers to some common questions about capital gains taxes in New Jersey when selling a residence.
You can defer paying capital gains taxes by reinvesting the sale proceeds through a qualifying like-kind 1031 exchange to purchase a similar property. Once that property is sold, you must pay taxes on the cumulative profit.
Yes, land is an asset and will be subject to capital gains taxes if you sell it and earn more than you paid for it.
No, this policy stopped in 1997 and was replaced by a policy that impacted all homeowners regardless of age.
Both federal and state taxes apply to capital gains in the Garden State. In New Jersey, capital gains are considered part of a taxpayer’s income and are taxed through the state’s individual income tax schedule.
No, you pay capital gains along with your income taxes. You do not pay them as part of the closing costs of a home.
No, capital gains taxes are not deductible. However, you may be able to use capital losses to offset capital gains and reduce your tax liability.
Yes. If you sell a secondary home in New Jersey, you must pay taxes on the capital gains realized. You cannot benefit from the state-level exclusion of capital gains, as it only applies to primary residences.
No. You realize a capital loss if you lose money on a home sale. Capital gains taxes do not apply to capital losses.
If you have used the home as a primary residence for at least two of the last five years, you will not pay capital gains taxes on the first $250,000 ($500,000 if married and filing jointly).
Currently, New Jersey does not have any laws in place that allow people above a certain age to stop paying capital gains taxes.
The exit tax is the name given to a type of estimated tax payment on the sale or transfer of real estate property by non-residents. It requires residents to withhold either 8.97% of the capital gains realized or 2% of the property’s final sale price, whichever is higher. Per the NJ Division of Taxation, the exit tax is not a tax levied on individuals for leaving the state, nor do residents have to pay it when moving out of state.
