What should I expect to pay in closing costs?
Aside from the brokerage fee, the seller is responsible for the following: Borough Transfer Inspection ($150), NJ Transfer tax (roughly 1% of sale price based on a proggressively sliding scale) and preparation of deed/misc paper work and service fees totaling approximately $500. In the case of non-residents, NJ also collects 2% of the sale price as witholding in anticipation of capital gains. This does not apply to entities, ie LLC or LP, or if the sale is part of a 1031 exchange. The 2% will be applied to your gain when your tax return is filed, or returned to you if no gain applies.
ESTIMATED INCOME TAX WITHHOLDING
In August of 2004, the State of New Jersey began to require an estimated tax payment to be made by all non-resident sellers. The lase states that we are to collect 2% of the gross sales price or 8.97% of the gain, but never to be less than 2% of the gross sales price. The tax is a prepayment toward the tax that would be due to the State of New Jersey for the income earned in the State.
All non-residents are required to file a non-resident tax return for the tax year of the sale of their residence and any additional tax due would be paid at that time and any over-payment would be refunded. If you are selling your property at a loss, you are still required to make this payment; however, you can file a “claim refund form” a few weeks after closing to show the loss on the property and obtain a refund.
When a property is being sold by an LLC, Corporation, or Partnership, bulk sales may be due. It is the buyer’s responsibility to notify the State of New Jersey, and the seller is responsible to provide the State of New Jersey with their tax information to determine if a payment is required. The necessary forms should be sent along with a fully signed agreement of sale to the State no later than 10 days prior to closing. Upon receipt of said forms the State will send a letter indicating whether an amount is to be escrowed by or to be paid to the state of New Jersey or that there is no tax due.
What if I have a capital gain?
Here’s a quick summary of long-term capital gains tax rates for federal tax purposes (all references to capital gains assume long-term capital gains, since short-term capital gains are taxed as ordinary income):
Your capital gains tax rate depends on your income bracket. If you are in the 10% or 15% bracket, the capital gains tax rate is 0%. If above the 15% bracket but below the top bracket of 39.6%, the capital gains tax rate is 15%. Finally, if you are in the 39.6% bracket, the capital gains tax rate is 20%.
In addition, there is a net investment tax that kicks in when your overall income is over certain thresholds depending on your filing status ($125K for single, $250K for married filing jointly, $200K for head of household). The net investment tax is an additional 3.8% tax on top of the previously mentioned capital gains tax rates, meaning that the top capital gains rate is 23.8% (20% for the top bracket + 3.8% net investment income tax). However, the amount that is hit with the additional tax is capped at the lower of the difference between total income and the applicable threshold, and investment income (this includes capital gains, interest, dividends, etc.).
A series of examples will show how this tax is calculated (assume it is a married couple):
Scenario A: Total income is $190K, capital gains are $50K. Total income is under $250K, the net investment income tax is zero. However, normal capital gains tax rates still apply.
Scenario B: Total income is $450K, capital gains are $50K. $450K is $200K over the threshold, so the entire $50K is subject to both the capital gains tax and the net investment income tax.
Scenario C: Total income is $280K, capital gains are $50K. $280K is only $30K over the threshold, therefore only $30K of the capital gain is subject to the net investment income tax. However, the entire gain is still subject to the normal capital gains tax rates.
NJ simply taxes all capital gains as ordinary income. The top income tax bracket for NJ is 8.97%.
1031 Tax deferred exchanges
If you are selling an investment property, generally income producing, or land (second homes do not qualify) you may defer the gain by purchasing a like-kind replacement property of equal or greater value. This is a tax-efficient way to utilize existing equity and move up to a better location or income opportunity. There are strict timing and reporting guidelines associated with these exchanges, and I would be happy to provide you with as much information as needed, just let me know.