Do I Have to Pay Taxes If I Sell My House in NJ?

Selling a home in New Jersey involves various tax obligations. Understanding these financial responsibilities before closing is important for accurate financial planning. Familiarity with both federal and state tax rules helps ensure a smooth transaction and compliance. This overview provides insights into the different taxes and reporting requirements when selling residential property in New Jersey.

Federal and New Jersey Capital Gains

When selling a home, the primary tax consideration often involves capital gains. Federally, a capital gain is the profit realized from the sale of an asset, including real estate. The Internal Revenue Service (IRS) offers the Section 121 exclusion for primary residences. This exclusion allows eligible homeowners to exclude up to $250,000 of gain from their taxable income, or up to $500,000 for married couples filing jointly.

To qualify for the Section 121 exclusion, the homeowner must meet both an ownership test and a use test. This means the home must have been owned and used as a principal residence for at least two of the five years leading up to the sale date. These two years do not need to be consecutive. If the gain exceeds the exclusion amount, the remaining profit may be subject to federal long-term or short-term capital gains tax rates, depending on the ownership period.

New Jersey treats capital gains from real estate sales as part of the seller’s gross income, subject to the New Jersey Gross Income Tax (NJGIFT). Unlike federal law, New Jersey does not have a direct equivalent to the Section 121 exclusion. While the state generally follows federal guidelines for calculating the gain, the federally determined gain (after any federal exclusions) is included in the seller’s income for state tax purposes. New Jersey does not differentiate between short-term and long-term capital gains, taxing both as ordinary income based on the taxpayer’s overall income bracket.

Other New Jersey Sale-Related Taxes

Beyond capital gains, sellers in New Jersey face additional state-specific taxes and fees. One obligation is the New Jersey Realty Transfer Fee (RTF), established under N.J.S.A. 46:15-7. This fee is paid by the seller and assessed when the deed is recorded to transfer ownership. The RTF is calculated based on the sale price and features a progressive rate structure.

Legislative changes effective July 10, 2025, modified the RTF for higher-value properties. Previously, buyers paid a 1% “mansion tax” on sales over $1,000,000. The new law eliminates this buyer fee, imposing a graduated percent fee (GPF) on the seller for transactions exceeding $1 million. For instance, sales between $1,000,000 and $2,000,000 incur a 1% fee on the seller, while sales over $3,500,000 face a 3.5% fee, in addition to the standard RTF. This shifts the financial responsibility for higher-value transactions entirely to the seller.

Another requirement is the New Jersey Seller’s Residency Tax, an estimated tax payment for non-resident sellers, as outlined in N.J.S.A. 54A:8-9. If the seller is not a permanent New Jersey resident, an estimated tax payment is required at closing. This estimated tax is calculated by multiplying the gain on the sale by the highest state tax rate, which is currently 10.75%, but the payment cannot be less than 2% of the gross sales price. This is an estimated payment, not the final tax liability, and is reconciled when the seller files their New Jersey Gross Income Tax Return.

Calculating Your Home Sale Gain or Loss

Determining the financial outcome of a home sale requires understanding “amount realized” and “adjusted basis.” The “amount realized” is the sale price less certain selling expenses. Deductible selling expenses can include real estate agent commissions, legal fees, title insurance fees, and other closing costs paid by the seller.

The “adjusted basis” represents the cost of the property for tax purposes. The original cost basis is the purchase price plus acquisition costs like legal fees, title insurance, and recording fees incurred when buying the property. The basis is adjusted by adding the cost of capital improvements, such as additions, major renovations, a new roof, or upgraded heating systems. Capital improvements enhance value or extend useful life, unlike routine repairs.

Any depreciation taken on the property, such as for a home office or rental portion, must be subtracted from the basis. Once “amount realized” and “adjusted basis” are determined, the gain or loss on the sale can be calculated. The formula is: Gain or Loss = Amount Realized – Adjusted Basis. This calculated gain or loss is used for tax reporting.

Reporting Your Home Sale

After the home sale and calculations are finalized, the transaction must be reported to tax authorities. The closing agent, such as a title company, issues Form 1099-S, “Proceeds From Real Estate Transactions.” This form reports gross proceeds from the sale to the IRS, and the seller receives a copy.

For federal tax purposes, the home sale is reported on the seller’s annual income tax return. This involves using Schedule D (Capital Gains and Losses) and Form 8949 (Sales and Other Dispositions of Capital Assets). The calculated gain, after applying any Section 121 exclusion, is carried to Form 1040. Even if the gain is fully excludable, the sale might still need to be reported if a Form 1099-S was received.

Reporting the sale to New Jersey involves including the federally determined gain or loss on the New Jersey Gross Income Tax Return (NJ-1040). This information is entered on the appropriate schedule, such as Schedule B. If an estimated tax payment was made by a non-resident seller, this payment is reconciled on the final NJ-1040 return to determine any remaining tax due or refund.