Buying or selling real estate is one of the most significant financial transactions most people will undertake. In New Jersey, real estate transactions come with a variety of taxes and fees that both buyers and sellers need to be aware of. Understanding these taxes is crucial for budgeting, planning, and avoiding unexpected costs. This blog post provides a comprehensive overview of the taxes on real estate transactions, covering everything from the Realty Transfer Fee to capital gains taxes. Whether you’re a first-time homebuyer, a seasoned investor, or selling a property, this guide will help you navigate the complexities of real estate taxes in the Garden State.
Realty Transfer Fee (RTF)
The Realty Transfer Fee (RTF) is one of the most significant taxes associated with real estate transactions in New Jersey. This fee is imposed by the state and is typically paid by the seller when the deed is recorded. The RTF is calculated based on the sale price of the property, and the rate varies depending on the amount. The higher the sale price, the higher the fee.
The RTF in New Jersey is calculated using a tiered structure. The fee is generally divided into three categories:
- Base Fee: Applies to all property transactions.
- Supplemental Fee: Applies to transactions over $350,000.
- General Purpose Fee: Applies to transactions over $1,000,000.
As of the latest update, the base fee starts at $2.00 per $500 of the sale price for properties valued at $350,000 or less. For properties valued between $350,001 and $1,000,000, an additional supplemental fee of $1.75 per $500 is added. For properties over $1,000,000, the general purpose fee adds another $1.25 per $500.
Exemptions and Reductions
Certain transactions may qualify for exemptions or reductions in the RTF. For example, transfers between spouses or civil union partners, transfers to or from a government entity, and transfers where the consideration is less than $100 are typically exempt from the RTF. Additionally, senior citizens, blind or disabled persons, and low- and moderate-income housing may qualify for a reduced fee. For the most current information on the RTF, you can refer to the official New Jersey Division of Taxation website.
Mansion Tax
Another significant tax to be aware of in New Jersey is the Mansion Tax. This tax applies to properties sold for more than $1 million. Introduced in 2004, the Mansion Tax is a 1% tax on the total purchase price of the property. Unlike the RTF, this tax is typically paid by the buyer at closing.
Who Pays the Mansion Tax?
While the tax is most commonly associated with high-end residential properties, it can also apply to commercial and industrial properties that exceed the $1 million threshold. For instance, if you purchase a commercial property for $1.2 million, you will be responsible for paying a $12,000 Mansion Tax at closing.
Special Considerations
There are no exemptions for the Mansion Tax, which means that all eligible transactions, whether residential or commercial, are subject to this 1% tax. It’s important for buyers of high-value properties to factor this tax into their overall budget when considering a purchase in New Jersey.
Property Tax
Property taxes are an ongoing obligation for property owners in New Jersey. Once you purchase real estate, you will be responsible for paying property taxes to your local municipality. These taxes fund local services such as schools, police, fire departments, and infrastructure maintenance.
How are Property Taxes Calculated?
Property taxes in New Jersey are calculated based on the assessed value of your property and the local tax rate, known as the millage rate. The assessed value is determined by the local tax assessor, and it may not always match the market value of your property. The millage rate is set annually by local government entities, such as school boards and municipal councils.
To calculate your annual property tax, you multiply the assessed value of your property by the millage rate. For example, if your property is assessed at $300,000 and the millage rate is 2.5%, your annual property tax would be $7,500.
Appealing Your Property Tax Assessment
If you believe your property has been over-assessed, you have the right to appeal the assessment. The appeals process involves filing a complaint with your county’s Board of Taxation and presenting evidence that your property’s assessed value is higher than its fair market value. Successful appeals can result in a reduction in your property tax bill.
Property Taxes for the Purchaser
Once you have purchased real estate in New Jersey, you will be responsible for paying property taxes to your local municipality. Property taxes are an ongoing financial obligation and are typically paid semi-annually.
Understanding Property Taxes
Property taxes in New Jersey are based on the assessed value of your property, which is determined by your local tax assessor, and the millage rate, which is set by local government entities such as school boards and municipal councils. The property tax you pay is calculated by multiplying the assessed value of your property by the millage rate.
For example, if your property is assessed at $400,000 and the local millage rate is 2.5%, your annual property tax bill would be $10,000.
Escrow Accounts
Most mortgage lenders require homebuyers to establish an escrow account at closing. This account is used to collect and pay property taxes (and often homeowners insurance) on your behalf. Each month, you will make a payment into the escrow account as part of your mortgage payment, and the lender will disburse funds from the account when property taxes are due.
Appealing Your Property Tax Assessment
If you believe your property has been over-assessed, resulting in higher property taxes, you have the right to appeal the assessment. This involves filing a complaint with your county’s Board of Taxation and providing evidence that the assessed value is higher than the fair market value of your property.
Property Taxes for the Seller
When selling a property in New Jersey, it’s important to understand your obligations regarding property taxes. Sellers are responsible for paying property taxes up to the closing date, and these taxes are typically prorated between the buyer and seller at closing.
Proration of Property Taxes
At closing, property taxes are prorated based on the number of days each party owns the property during the tax period. For example, if you close on your property on June 30, you would be responsible for paying property taxes for the first half of the year, and the buyer would be responsible for the taxes from July 1 onward.
Settlement of Property Taxes at Closing
During the closing process, the title company or closing agent will calculate the exact amount of property taxes owed by the seller and the buyer. The seller’s portion of the taxes is typically deducted from the proceeds of the sale, ensuring that both parties only pay for the period during which they owned the property.
Final Tax Bill Considerations
Sellers should also be aware of the timing of their final property tax bill. If you receive a tax bill after the sale has closed, and it covers a period during which you no longer owned the property, you should forward the bill to the new owner or your real estate agent to ensure it is paid correctly.
Income Tax on Sale of Property
When you sell real estate in New Jersey, the sale may be subject to income tax. The income tax applies to any gain you realize from the sale of your property. This gain is the difference between the selling price and your “basis” in the property, which is generally the amount you paid for the property plus the cost of any improvements.
Capital Gains Tax
If you sell your property for more than you paid for it, you will have a capital gain. Capital gains are subject to federal and state income taxes. In New Jersey, the capital gains tax is included as part of your state income tax return.
For federal taxes, if you’ve owned the property for more than one year, you will be subject to the long-term capital gains tax rate, which is generally lower than the rate for short-term gains (for property held less than one year). The federal rate for long-term capital gains varies from 0% to 20% depending on your income level.
Exclusions for Primary Residence
If the property you are selling is your primary residence, you may be eligible for a significant exclusion from capital gains tax under both federal and New Jersey law. The IRS allows an exclusion of up to $250,000 of gain ($500,000 for married couples filing jointly) if you have owned and lived in the home for at least two of the five years preceding the sale.
New Jersey also offers an exclusion for capital gains on the sale of a primary residence, but there are specific rules and limits, so it’s important to consult with a tax professional to understand your specific situation.
Non-Resident Withholding Tax
If you are not a resident of New Jersey but are selling real estate in the state, you will be subject to the Non-Resident Withholding Tax. This tax is designed to ensure that non-residents pay their New Jersey state income taxes on any gains realized from the sale of property in the state.
What is the Non-Resident Withholding Tax?
The Non-Resident Withholding Tax is typically calculated as the greater of 8.97% of the gain on the sale or 2% of the sale price. This amount is withheld at the closing of the transaction and is paid directly to the New Jersey Division of Taxation.
Filing Requirements for Non-Residents
Non-residents are required to file a New Jersey non-resident income tax return (Form NJ-1040NR) to report the sale and pay any additional taxes owed. If the amount withheld at closing exceeds the tax liability, the seller can apply for a refund when filing the tax return.
Inheritance and Estate Taxes
In New Jersey, the transfer of real estate upon the death of the owner may be subject to inheritance and estate taxes. Although New Jersey no longer imposes an estate tax, the state does levy an inheritance tax, which applies to certain beneficiaries of the deceased’s estate.
Inheritance Tax
The inheritance tax in New Jersey is based on the relationship of the beneficiary to the deceased. Close relatives, such as spouses, children, and grandchildren, are generally exempt from the inheritance tax. However, more distant relatives, such as siblings, cousins, and unrelated beneficiaries, may be subject to a tax that ranges from 11% to 16% of the value of the inheritance.
Real Estate Transfers and Inheritance Tax
If you inherit real estate and are subject to the inheritance tax, the tax will be based on the appraised value of the property. The tax must be paid before the property can be transferred to the beneficiary.
Tax Implications for Investment Properties
Investment properties come with their own set of tax implications in New Jersey. If you own real estate that you rent out or hold as an investment, you will need to consider several tax issues, including rental income taxes, depreciation, and capital gains on the sale of the property.
Rental Income Taxes
Rental income is considered taxable income in New Jersey. If you rent out property, you must report the rental income on your New Jersey state income tax return. You can deduct certain expenses related to the rental property, such as mortgage interest, property taxes, maintenance, and repairs.
Depreciation
Investment properties are subject to depreciation, which is a tax deduction that allows you to recover the cost of the property over time. Depreciation can significantly reduce your taxable rental income. However, when you sell the property, the amount of depreciation you claimed over the years will be recaptured and taxed as ordinary income.
1031 Exchange
A 1031 Exchange is a tax-deferral strategy that allows you to defer paying capital gains taxes on the sale of an investment property if you reinvest the proceeds into a similar property. To qualify for a 1031 Exchange, the new property must be of “like-kind,” and the transaction must meet specific IRS requirements.
Tax Credits and Incentives
New Jersey offers several tax credits and incentives that can help offset the costs of owning or improving real estate. These programs are designed to encourage property development, renovation, and energy efficiency.
Property Tax Reimbursement (Senior Freeze)
The Property Tax Reimbursement program, also known as the Senior Freeze, is available to eligible senior citizens and disabled persons. This program reimburses eligible homeowners for property tax increases on their principal residence. To qualify, you must meet certain age, income, and residency requirements.
Homestead Benefit
The Homestead Benefit is another program that provides property tax relief to eligible homeowners. The benefit is based on the amount of property taxes paid and the homeowner’s income. The Homestead Benefit is typically applied directly to your property tax bill, reducing the amount you owe.
Energy Efficiency Incentives
New Jersey offers various incentives for property owners who make energy-efficient improvements to their homes. These incentives may include tax credits, rebates, and low-interest loans for upgrades such as insulation, energy-efficient windows, and renewable energy systems.
Taxes on Real Estate Transactions in New Jersey final thoughts
Understanding the various taxes associated with real estate transactions in New Jersey is essential for both buyers and sellers. By being aware of these taxes and seeking professional advice when necessary, you can manage these costs effectively and navigate New Jersey’s real estate market with confidence.
Real Estate Tax Help in New Jersey
If you need guidance on buying or selling property in New Jersey, the team at Sammarro & Zalrick is here to help. Contact us to schedule a free consultation with one of our specialist lawyers who can assist you with your real estate needs.