Q. Our home was bought in 1993 for $237,000 and we will be selling for $665,000 and closing before the end of the year. Naturally in the 29 years we have lived here, there has been oodles of money spent on home improvements. A few receipts were kept but not for all of 29 years. How can I prove my home improvements to deduct from our gain and do I really need to? And we are moving to Delaware. Will we owe the exit tax?
A. Congratulations on the sale of your home, and we’re sorry to see you’re leaving the state.
There are several issues to consider here.
First, federal and New Jersey law both exclude up to $500,000 of gain realized on the sale of a primary residence by a joint return filer, or $250,000 for a single filer, provided the home was both owned and used as a residence for at least two out of the preceding five years, said Michael Eagan, director of national tax for CohnReznick in Holmdel.
Both are clearly met in your case.
He said without consideration of any capital improvements you made to your home in the past 29 years, your gain of $428,000 would be fully excluded.
“You would typically substantiate the improvements with invoices, receipts, canceled checks, etc., but because your gain is, even without capital improvements, below the exclusion, you will not likely need be asked for that substantiation,” Eagan said. “You would want to report the proper gain — including the improvements — but it is unlikely you would ever be asked to prove those amounts.”
Now the so-called exit tax, which is really an estimated tax based on the sale price of your home.
New Jersey treats sellers of New Jersey residences remaining in the state differently than those moving out of state, Eagan said.
Since you plan on moving to Delaware, New Jersey would consider you a “nonresident” for purposes of the sale.
“This means a portion of the sales price or expected gain may be withheld as an advance payment of tax due with respect to the sale — the so-called exit tax,” he said. “Because the gain in your case is below the $500,000 exclusion amount, and withholding would be refundable, subject to credit against other New Jersey tax liability.”
For more information, check out New Jersey’s guide to buying or selling a home.
Email your questions to [email protected].
Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.
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