Tax question on selling a house in NJ (sales, real estate)

[pw729]

My husband and his 4 siblings are selling a house at the NJ shore -- it is not a primary residence for any of the 5 owners and they have owned it since 1995 when it was "gifted" by there father for a price of $1. The realtor is suggesting that the contract be in the name of 1 of the 5 owners -- the only one that resides in NJ. She believes that if the contract is written for all 5 owners, then the 4 living outside NJ will have to pay "Out of State Taxes". What are these out of state taxes?
And, shouldn't the contract be in all 5 owner's names since all 5 will ultimately have to pay Capital Gains Taxes? Thanks,

[gawalisjr]

It appears that the contract should be in the names of all owners... but that is a question for a real estate attorney.
Taxes will be on the the taxable capital gain at both the Federal and NJ levels.
The out of state owners will have to file non-resident NJ tax returns for the year of sale and pay NJ tax on their portion of the capital gain.

[AntoinetteNJ]

Absolutely consult a real estate or tax attorney on this question. You need to be certain about the correct procedure!

[MaverickDD]

Originally Posted by pw729

My husband and his 4 siblings are selling a house at the NJ shore -- it is not a primary residence for any of the 5 owners and they have owned it since 1995 when it was "gifted" by there father for a price of $1. The realtor is suggesting that the contract be in the name of 1 of the 5 owners -- the only one that resides in NJ. She believes that if the contract is written for all 5 owners, then the 4 living outside NJ will have to pay "Out of State Taxes". What are these out of state taxes?
And, shouldn't the contract be in all 5 owner's names since all 5 will ultimately have to pay Capital Gains Taxes? Thanks,

In brief:
* Yes, if all five people own the house, the contract should be in all five owners' names. However, it's not uncommon for out-of-state "partners" to give the local partner limited power-of-attorney to complete the paperwork.
* Yes, ultimately all five will have to pay their respective share of the New Jersey income tax on the capital gain resulting from the sale. (Be aware, however, that the tax basis is not just $1. The tax basis is the father's basis on the date of the gift plus all of the property improvements that have been made over the years.)

Suggesting that a contract be in the name of the Jersey resident to avoid the "Out of State Taxes" demonstrates an ignorance of process -- of laws governing real estate transactions and as well as tax consequences.

Sounds to me like the Realtor is trying to help you avoid the state's tax withholding requirement on sales by non-residents. First off, this isn't the way to do it. Secondly, even if you avoid having withholding taken out of the sale proceeds, you've correctly noted that ultimately all owners will have to pay their respective share of the income tax, so it's a pointless effort to avoid the withholding.

* Limited POA is a good idea.
* Let the withholding be taken from the proceeds.
* All five owners report their share of the gain on their personal income tax returns with out-of-state owners needing to file NJ non-resident returns in the year of sale.

(Not a lawyer... not legal advice... blah, blah, blah...)

[Bill Keegan]

Originally Posted by pw729

My husband and his 4 siblings are selling a house at the NJ shore -- it is not a primary residence for any of the 5 owners and they have owned it since 1995 when it was "gifted" by there father for a price of $1. The realtor is suggesting that the contract be in the name of 1 of the 5 owners -- the only one that resides in NJ. She believes that if the contract is written for all 5 owners, then the 4 living outside NJ will have to pay "Out of State Taxes". What are these out of state taxes?
And, shouldn't the contract be in all 5 owner's names since all 5 will ultimately have to pay Capital Gains Taxes? Thanks,

Whatever name or names are on the deed need to be on the contract to sell. Sure, consult with an attorney about the legal and tax ramifications, but the simple fact is that the owners are selling it. So all the owners need to agree to sell it.

[kcl111]

Originally Posted by pw729

My husband and his 4 siblings are selling a house at the NJ shore -- it is not a primary residence for any of the 5 owners and they have owned it since 1995 when it was "gifted" by there father for a price of $1. The realtor is suggesting that the contract be in the name of 1 of the 5 owners -- the only one that resides in NJ. She believes that if the contract is written for all 5 owners, then the 4 living outside NJ will have to pay "Out of State Taxes". What are these out of state taxes?
And, shouldn't the contract be in all 5 owner's names since all 5 will ultimately have to pay Capital Gains Taxes? Thanks,

this is the form that will be prepared by your attorney
http://www.state.nj.us/treasury/taxa...ee/gitrep1.pdf

^^ the tax will be 8% or 9% of the contract price and it will only need to be paid once.

[MaverickDD]

Originally Posted by kcl111

this is the form that will be prepared by your attorney
http://www.state.nj.us/treasury/taxa...ee/gitrep1.pdf

^^ the tax will be 8% or 9% of the contract price and it will only need to be paid once.

Thanks for the link to the form.

From the instructions:
(Estimated) Tax payment is determined by multiplying the gain on the sale of the property by the highest Gross Income Tax rate of 8.97%. ... In no case can the payment be less than 2% of the consideration received.

What it's not: The tax is not 8% or 9% of the price. (The tax cannot be computed until the Seller files his/her/their NJ non-resident Income Tax Return for the year, form NJ-1040NR.)

What it is: The mandatory estimated tax payment is 8.97% of the realized gain, but in no case, less than 2% of the sales price.

Example 1: You sell the property for $300,000 and the basis is $200,000. The estimated tax payment is calculated as follows: $100,000 gain times 8.97% equals $8,970. This is greater than 2% of the sales price ($6,000), so the minimum is not applicable. Send in $8,970.

Example 2: You sell the property for $300,000 and the basis is $250,000. The estimated tax payment is calculated as follows: $50,000 gain times 8.97% equals $4,485. This is less than 2% of the sales price ($6,000), so the minimum is applicable. Send in $6,000.

It cannot be stressed strongly enough that this is an estimated tax payment. The actual tax cannot be computed until Sellers file their non-resident income tax returns for the year.

[nawsj]

Regarding the withholding on the sale of a home in NJ by a non-resident, what happens if amount of the gain on the sale is below the minimum filing threshold for non-residents in NJ of $20,000? Do you need to file a 1040-NR and claim a full refund of the withhholding? Does the minimum filing requirement even apply? Can you use Form A3128 to claim a quick refund of the withheld tax?

[MaverickDD]

Originally Posted by nawsj

Regarding the withholding on the sale of a home in NJ by a non-resident, what happens if amount of the gain on the sale is below the minimum filing threshold for non-residents in NJ of $20,000? Do you need to file a 1040-NR and claim a full refund of the withhholding? Does the minimum filing requirement even apply? Can you use Form A3128 to claim a quick refund of the withheld tax?

Interesting form, the A3128. I admit ignorance! I've never seen it before.

Yes, you still have to file the NJ-1040NR if the gain is less than $20,000. You have to file the return so you demonstrate what your basis is. If you don't file the return showing the basis, the state may assume your basis is zero and seek to tax you on the entire sales price.

I tell people to file even of you don't have to. It starts the clock...

[tom1944]

Maverick- good posts. One problem we have is that misinformation is given out and people take it as gospel and run with it. I have heard this "exit tax" canard so much it is ridiculous.