Taxes You’ll Encounter in Your NJ Real Estate Transaction

When buying or selling a home in New Jersey, there are some taxes you may not be expecting that you should be aware of, as they may impact the net profits from your sale. Here is an overview:

NJ Realty Transfer Fee

The State of New Jersey imposes a Realty Transfer Fee on the seller of real estate for recording a deed for the sale. The RTF is calculated based on the amount of consideration noted in the deed. The RTF applies to every conveyance of title to real property in New Jersey, unless the deed or transfer meets an exemption. Exemptions would include things like transfers between a parent and child or spouses, or where the consideration is under $100. Rates for the RTF vary depending on the amount of the sale price, age, and income level of the seller. Generally, a good ballpark is that the RTF paid will be about 1% of the sale price. Here is a handy calculator you can use to determine the amount of your RTF.

“Millionaire’s Tax”

As a supplemental fee to the RTF, the State imposes a fee on the recording of the deed for the sale of real property when the consideration paid is more than $1,000,000. While the seller pays the RTF, the buyer pays this supplemental fee of 1% of the consideration recited in the deed. If a buyer paid $1.2 million for a home, the tax they would pay at closing would be $12,000.

Capital Gain Tax

Capital gain tax is a tax on the profit from your home sale. The amount of the gain is calculated by subtracting the original purchase price, the value of any improvements, and transaction costs from the sale price. There are exemptions from this tax. If you have owned and occupied your current home for at least two of the last five years, typically the first $250,000 of profit for a single filer or $500,000 of profit for a married couple filing jointly is excluded. If you have not met this test, you may still qualify for an exemption based on certain hardship situations that would have necessitated a sale soon after your purchase. Generally, you’re not eligible for the exclusion if you excluded the gain from the sale of another home during the two years before the sale of your home.

NJ “Exit Tax”

Commonly known as the “exit tax”, the proper name for this tax is actually "Estimated Gross Income Tax Payment Requirement for Nonresident Sellers of Real Property in New Jersey”. The exit tax is not an exit tax but escrow of the taxes you might potentially owe on the profit from your sale. The tax was enacted in 2004, not to prevent people from leaving the state but to prevent them from leaving and not paying their state tax bill. This can negatively impact your cash flow if you need the entirety of the proceeds from your sale immediately after closing, as tax payment is held until you settle your state income tax return. The amount withheld or amount withheld will be 8.97% of the profit/capital gain on the sale or 2% of the total sale price, whichever is higher. Once you file your NJ tax return, any capital gain tax you owe will be deducted from your estimated tax payment. If you sell at a loss or do not have a capital gain, you will still be required to make an estimated payment but which will be refunded after you file your NJ tax return.

Working with a real estate professional and a tax advisor can help you understand the costs involved in the sale of a home in SOMA. Do not hesitate to email me at [email protected] to set up a time to chat about your plans for 2023.

The Allison Ziefert Real Estate Group is a top-producing real estate team based at Compass in Short Hills, NJ. We are local market experts, specializing in real estate and homes in Maplewood, South Orange, Millburn/Short Hills, Montclair/Glen Ridge, West Orange, Morristown, and the surrounding NJ towns. We are driven by earning great testimonials and referral business from happy clients. You can read our reviews here.