Buying a home in New Jersey can be a big decision, and there are a lot of things to think about, including different taxes and possible ways to save money. This guide will help people who live in New Jersey and those who don’t live in the state understand what taxes they need to pay and what programs can help. From property taxes to available tax deductions, here’s what you need to know.
Tax Responsibilities When Buying a Home in New Jersey
Sales Tax
Good news: there is no sales tax on buying a home in New Jersey. This makes buying a home a little easier compared to other states that do have a sales tax. Knowing that there is no sales tax can help you plan your budget better.
Realty Transfer Fee
The Realty Transfer Fee (RTF) is an important fee when buying or selling a home in New Jersey. Usually, the seller has to pay 1% of the sale price as the Realty Transfer Fee. If the house is sold for more than $1 million, the buyer might also have to pay an extra 1% fee. It’s important to know about this fee because it can affect the closing costs. You can find more information on the Realty Transfer Fee here.
Who Pays the Realty Transfer Fee?
The seller usually pays the Realty Transfer Fee, but if the house costs more than $1 million, the buyer might also need to help. This fee is used to pay for the cost of transferring the property title and keeping state records. Make sure to talk to your real estate agent or lawyer to understand how this fee could affect your costs.
The Realty Transfer Fee gets bigger as the price of the home goes up. Sellers need to plan for this fee because it can be a big part of the closing costs. Some sellers, like senior citizens or those in low-income housing, might be able to get an exemption to lower the fee.
Property Tax Relief Programs Available in New Jersey
Homeowners in New Jersey can get help with their property taxes through different programs offered by the state and local governments. These programs are meant to make owning a home more affordable.
State Relief Programs
- Homestead Benefit Program: This program helps homeowners lower their property tax bills. You qualify based on your income, age, and whether you live in the home.
- How to Apply: To get the Homestead Benefit, you need to fill out your income tax return and say that you qualify. The program changes each year, so make sure you meet the requirements. If approved, the benefit can either go towards your property tax bill or be sent as a rebate check.
- Senior Freeze Program (Property Tax Reimbursement): This program is for seniors and people with disabilities. It helps pay back any property tax increases.
- Eligibility Criteria: To qualify for the Senior Freeze Program, you must have lived in New Jersey for at least ten years and owned your home for three years. This program makes sure that seniors and people with disabilities are not affected by rising property taxes.
- How to Apply: You need to fill out the PTR-1 form, which you can get from the New Jersey Division of Taxation website. You have to apply every year to keep getting the benefit.
For more details on these programs, visit the NJ Property Tax Relief page.
State Income Tax Benefits
New Jersey also gives homeowners the chance to lower their state income taxes based on the property taxes they pay. These include:
- Property Tax Credit: This credit is available if your income is below a certain amount. It helps reduce the amount of taxes you owe.
- Property Tax Deduction: This deduction helps you pay less in state income taxes based on the property taxes you paid during the year.
To learn more, visit NJ Property Tax Deduction/Credit Information.
Local Property Tax Benefits
Local governments also have property tax benefits, such as:
- Annual Property Tax Deduction for Senior Citizens and Disabled Persons: This deduction is for people who meet certain age or disability requirements. It can save you money on your local property taxes.
- Annual Deduction for Veterans: Veterans can get a yearly deduction on their property taxes, which helps reduce their overall costs.
- Property Tax Exemption for Disabled Veterans: Some veterans with disabilities can qualify for a complete exemption from property taxes, which can be a big financial relief.
To find out more, contact your local property tax office or city hall. These benefits can help lower your yearly property tax and make owning a home more affordable.
Selling a Home in New Jersey: Tax Requirements
Selling a home in New Jersey means you have to fill out certain tax forms and meet some requirements. Understanding these requirements is important to make sure the process goes smoothly.
GIT/REP Forms
When you sell a property, all sellers need to fill out a GIT/REP Form to record the deed. Nonresidents also need to complete either GIT/REP-1 or GIT/REP-2 depending on their situation. These forms help make sure that any estimated tax payments are taken care of at closing.
- GIT/REP-1: Nonresidents use this form to show their tax responsibilities.
- GIT/REP-2: Nonresidents who want to pay their taxes before closing use this form.
- GIT/REP-3: Residents use this form to avoid paying estimated taxes at closing.
Affidavit of Consideration
Most sellers also need to provide an Affidavit of Consideration for Use by Seller (form RTF-1) when closing on a home. This document is needed to finish the sale and is used along with the Realty Transfer Fee.
- Purpose of the Affidavit: This document makes sure the state knows all the details of the sale, like the price and any tax exemptions. Filling it out properly helps prevent delays in recording the sale.
Estimated Gross Income Tax for Nonresidents
If you don’t live in New Jersey and are selling property here, you need to know that you must pay an estimated Gross Income Tax. This is either 2% of the total sale price or 8.97% of the net gain. Filling out the right GIT/REP forms correctly will help you avoid delays.
- Avoiding Delays: Nonresidents need to make sure all the paperwork is filled out correctly to avoid delays when the deed is recorded and the sale is completed. Mistakes could lead to penalties or extra taxes.
- Refunds for Overpayment: If nonresident sellers pay too much in taxes, they can apply for a refund after the sale by submitting Form A-3128. This makes sure you don’t pay more than you owe.
Reporting Income or Loss from the Sale of Property
Any money made from selling a home must be reported as a capital gain. New Jersey residents need to fill out Schedule B of the NJ-1040 form, while nonresidents must fill out Part I of NJ-1040-NR. Be sure to report any estimated taxes you paid at closing to avoid issues later.
Principal Residence Exclusion
If you are selling your main home, you might be able to avoid paying taxes on some of the profit. Married couples filing together can avoid taxes on up to $500,000 of the gain, while single people or married couples filing separately can avoid taxes on up to $250,000. To qualify, you need to meet these conditions:
- Ownership Test: You must have owned the home for at least two years during the last five years.
- Use Test: You must have lived in the home as your main residence for at least two years during the last five years.
- Additional Home Test: If you owned more than one home, you can only avoid taxes on the profit from one home sale within a two-year period.
For more information, see IRS Publication 523.
Reporting Capital Gains
Capital gains are figured out by comparing the sale price to the adjusted cost of the home. Keep good records of any improvements you made, as these can raise the cost basis and lower the taxable gain.
- Home Improvements: Improvements that add value to your home, like adding a room, remodeling, or replacing the roof, can increase the cost basis and help you pay less in taxes.
- Documenting Expenses: Keep all receipts and records of improvements, since these will be needed when you calculate your gains and report them on your taxes.
Important Resources for Buyers and Sellers
Buying or selling a home can be complicated, but these resources can help:
- New Jersey Division of Taxation – Realty Transfer Fee
- HUD – Buying a Home
- Consumer Financial Protection Bureau – Protect Your Mortgage
- NJ Division of Taxation – Forms and Resources
- NJ Realtors Association
- IRS Publication 523 – Selling Your Home
These resources have helpful information and tools for making smart decisions when buying or selling a home in New Jersey.
Final Thoughts
Whether you’re buying or selling a home in New Jersey, it’s important to understand the tax rules to make the process go as smoothly as possible. Using property tax relief programs can help you save money, and filling out all the paperwork correctly will make sure you stay on track with state requirements.
Take advantage of the state and local programs that are there to help with the costs of buying or selling a home. Make sure you meet all the qualifications, and talk to a real estate expert or tax advisor if you need extra help.
Buying or selling a home has a lot of steps, and being informed is the best way to handle it all. From understanding transfer fees to finding tax relief programs, being prepared can save you time and money.
If you’re thinking about buying or selling a home in Ocean City, NJ, and need help, visit us at liveocnj.com. We’re here to guide you every step of the way and help you make the best choices for your future.