Q. Our home was purchased in 1993 for $237,000 and we will sell it for $665,000 and close before the end of the year. Of course, in the 29 years we’ve lived here, tons of money has been spent on home improvement. A few receipts were kept, but not for all 29 years. How can I prove my home improvement work to deduct from our profit and do I really have to do this? And we’re moving to Delaware. Will we owe the exit tax?
A. Congratulations on the sale of your home and we are sorry you are leaving the state.
There are several issues to consider here.
First, both federal and New Jersey law preclude a gain of up to $500,000 made on the sale of a principal residence by a joint claimant or $250,000 for a single claimant, provided the home was both owned and owned as a residence for at least two people from the previous five years, said Michael Eagan, director of national taxes at CohnReznick in Holmdel.
Both are clearly fulfilled in your case.
He said if you didn’t factor in capital improvements you’ve made to your home over the past 29 years, your $428,000 gain would be completely eliminated.
“You would normally justify the improvements with invoices, receipts, canceled checks, etc., but since your profit is under exclusion even without capital improvements, you probably don’t need to be asked for that justification,” Eagan said. “You would want to report the correct gain – including improvements – but you are unlikely ever to be asked to prove those amounts.”
Now the so-called exit tax, which is really an estimated tax based on the selling price of your home.
New Jersey treats New Jersey home sellers who remain in the state differently than those who move out of the state, Eagan said.
Since you are planning to move to Delaware, New Jersey would consider you a “non-resident” for purposes of sale.
“This means that part of the sales price or expected profit can be withheld as an advance payment of taxes due in connection with the sale – the so-called exit tax,” he said. “Because in your case, the gain is less than the $500,000 cut-off and the withholding tax would be recoverable, subject to credit against other New Jersey tax liabilities.”
For more information, see New Jersey’s Guide to Buying or Selling a Home.
Email your questions to [email protected].
Karin Preis Müller writes them Perplexed 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.