"Do I have to pay capital gains tax when I sell my house in New Jersey?" It's one of the most-searched questions from NJ sellers, and there's a lot of confusing (and scary) information out there, especially about the so-called "New Jersey exit tax." I'm Jerry Mac with Keller Williams Realty. I'm not an accountant, but after 23 years of helping South Jersey homeowners sell, I can walk you through the basics so you know what questions to ask your tax pro before you list.

The Good News: Most Homeowners Owe Little or Nothing

If you're selling the home you live in, the federal tax code has a big break called the home sale exclusion (Section 121 of the tax code). If you qualify, you can exclude up to:

  • $250,000 of profit if you're single
  • $500,000 of profit if you're married and file jointly

To qualify, you generally need to have owned and lived in the home as your main residence for at least 2 of the last 5 years before the sale, and you can't have used the exclusion on another home in the past 2 years. New Jersey generally follows this same exclusion for a principal residence.

A quick example

Say a married couple bought their Cherry Hill home years ago for $200,000, spent $40,000 on a new kitchen and roof, and sell it today for $450,000. Their profit is roughly the sale price, minus what they paid, minus improvements and selling costs. That's well under $500,000, so in most cases they'd owe no capital gains tax at all.

How Your Profit (Capital Gain) Is Figured

Sale price - selling costs - (purchase price + qualifying improvements) = capital gain

Selling costs such as commission, the NJ Realty Transfer Fee and attorney fees reduce your gain. So do many improvements, like additions, a new roof, HVAC or a remodeled kitchen. Keep your receipts. They can save you real money. For a full list of what it costs to sell, see What Does It Cost to Sell a House in South Jersey?

When You Might Owe Capital Gains Tax

  • Your profit is more than $250,000 (single) or $500,000 (married).
  • You haven't lived in the home for 2 of the last 5 years.
  • It's a rental, investment or second home. The home sale exclusion doesn't apply the same way, though a 1031 exchange may help investors defer taxes if it's set up before the sale.

New Jersey taxes capital gains as regular income, using the state's income tax brackets, which currently run from 1.4% up to 10.75%. There's no separate lower NJ rate for long-term gains. Federally, owning for more than a year usually means lower long-term capital gains rates.

What Is the New Jersey "Exit Tax"?

This is the part that scares people, and it's mostly a misunderstanding. New Jersey doesn't charge you a tax for leaving the state. The "exit tax" is really an estimated income tax payment collected at closing from sellers who are not New Jersey residents when the deed transfers.

  • If you're still a NJ resident at closing, you generally sign a form (GIT/REP-3) certifying that, and nothing is withheld.
  • If you've already moved out of state, New Jersey typically collects the greater of 2% of the sale price or the estimated gain times the top state income tax rate (GIT/REP-1).
  • If the home was your principal residence and qualifies for the federal exclusion, you may be exempt from the payment.

If too much is withheld, it's not lost. You get the extra back when you file your New Jersey nonresident return, or sooner with a refund claim.

Selling your NJ home and moving out of state? Talk to your attorney and CPA about when you move versus when you close. The timing can make a big difference in what's held at the closing table.

Frequently Asked Questions

How do I avoid capital gains tax when selling my house in NJ?

For most people, the answer is the home sale exclusion: live in the home as your main residence for at least 2 of the last 5 years, and keep your profit under $250,000 (single) or $500,000 (married). Tracking improvements and selling costs also lowers your taxable gain.

How much tax do I pay when I sell my house in NJ?

If your gain is covered by the exclusion, often nothing. If not, the taxable part is taxed federally at capital gains rates and in New Jersey as ordinary income.

How long do I have to own a house before selling to avoid capital gains tax?

To use the home sale exclusion, you generally need to own it and live in it for at least 2 of the 5 years before the sale.

Do I have to report the sale of my home on my tax return?

Often you won't owe tax, but you may still need to report the sale, for example if you receive a Form 1099-S at closing. Ask your tax preparer.

Plan Ahead and Keep More of Your Money

The best time to think about taxes is before you list. I'm happy to give you a free estimate of your home's value so you and your CPA can run the numbers. Get your free home value estimate here, or learn more about selling your house in Cherry Hill.

Call or text Jerry Mac at 856-220-1874, email jerrymachomes@gmail.com, or visit www.southjerseyrealty.com.

Jerry Mac, Keller Williams Realty. I'm a Realtor, not a tax advisor or attorney. This article is general information, not tax or legal advice, and tax laws change. Please talk with a CPA or real estate attorney about your situation. Equal Housing Opportunity.