Short answer: Most New Jersey homeowners pay no capital gains tax on the sale of their main home. If you owned and lived in it for at least two of the last five years, you can exclude up to $250,000 of gain, or $500,000 if married filing jointly. New Jersey follows the same exclusion.
Gain above that amount is taxable on both your federal and New Jersey returns.
The home sale exclusion
To qualify, you generally must:
- Own the home for at least two of the five years before the sale.
- Live in it as your main residence for at least two of those five years.
- Not have used the exclusion on another home in the prior two years.
New Jersey’s Division of Taxation states that any gain taxable federally is also taxable for New Jersey purposes. Age does not matter.
How the gain is calculated
Gain is your sale price, minus selling costs, minus your basis. Basis is what you paid plus capital improvements such as a new roof, an addition or a kitchen renovation. Keep receipts for improvements, because they reduce your taxable gain. Our list of renovations that raise sale price is a good place to see which projects count.
Example
A married couple bought a Morris County home for $400,000, added $80,000 of improvements and sells for $1,000,000 with $60,000 of selling costs. Their gain is $460,000, which is under the $500,000 exclusion, so no capital gains tax is due.
When you may owe tax
- Your gain exceeds $250,000 or $500,000.
- The home was a rental or second home, not your main residence.
- You did not meet the two-year tests (a partial exclusion may apply for job moves, health or other qualifying reasons).
Investors selling rentals face different rules, including depreciation recapture. See our page for real estate investors.
Moving out of New Jersey?
Nonresident sellers may have to make an estimated income tax payment at closing unless they qualify for an exemption, such as the principal residence exclusion. Read selling a house in NJ and moving out of state.
Inherited homes
Heirs usually receive a “stepped-up” basis equal to the value at the date of death, which often reduces or eliminates gain. See selling an inherited home in New Jersey.
This article is general information, not legal or tax advice. Rules change and can vary by town, so confirm details with your attorney, accountant or the agency named before you act.
Frequently asked questions
Do you pay NJ state tax on capital gains from a home sale?
Only on gain above the exclusion. New Jersey follows the federal exclusion of $250,000, or $500,000 for married couples filing jointly.
How do I avoid capital gains tax on a house in NJ?
Meet the two-of-five-year ownership and use tests, and track capital improvements, which raise your basis and lower your gain.
Do I pay capital gains if I sell my house and buy another?
The old rollover rule no longer applies. The exclusion is what shields most of the gain, whether or not you buy again.
Sources
- NJ Division of Taxation: Sale of a principal residence
- NJ Division of Taxation: Buying or Selling a Home in New Jersey
Talk to the MorrisAgent Team
Thinking about selling and want to see your numbers? Call (973) 200-4800, email [email protected], or stop by our office at 518 Main Street, Suite 102, Boonton. No pressure, and no surprises.