If you sell your primary home in New Jersey and you have owned and lived in it for at least two of the last five years, you probably owe no income tax on the first $250,000 of profit, or $500,000 if you file jointly. New Jersey follows the federal rule on that exclusion, so the same shelter applies on both returns.1NJ Division of Taxation. Income Tax – Sale of a Residence The taxes when selling a house in NJ that catch people off guard are the ones that hit regardless of profit: the state’s Realty Transfer Fee, which every seller pays at closing, and, for out-of-state sellers, a mandatory estimated income tax payment worth thousands of dollars.
The Exclusion That Wipes Out Most Sellers’ Income Tax
Section 121 of the Internal Revenue Code lets a single filer exclude up to $250,000 of gain from selling a principal residence, and joint filers up to $500,000 when both spouses meet the requirements. To qualify, you must have owned the home for at least two of the five years ending on the sale date, and lived in it as your primary residence for at least two of those same five years. The two years don’t have to be consecutive, just 24 months total inside that window.2Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
Fall short of two years and you may still get a partial exclusion if the sale was driven by a job relocation, a health issue, or another unforeseen circumstance. The amount is prorated: divide the months you did qualify by 24, then apply that fraction to $250,000 or $500,000. A married couple selling at 15 months for a qualifying job change would get 15/24 of $500,000, or $312,500.2Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
The exclusion is only available once every two years. If you already used it on another home sale within the prior two years, you can’t use it again on this one.2Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence New Jersey conforms to these rules by regulation, so a gain that qualifies federally also qualifies for state purposes.3Cornell Law Institute. N.J. Admin. Code 18:35-2.4
How to Figure Your Gain
Whether the exclusion covers you depends on the size of your gain, and the gain is often smaller than sellers assume. Start with the sale price and subtract selling costs: broker commissions, attorney fees, title insurance you paid, and transfer fees. If your home sold for $750,000 and those costs totaled $45,000, your amount realized is $705,000.
Then figure your adjusted basis. Begin with what you originally paid, including purchase closing costs, and add any capital improvements over the years. Capital improvements are permanent upgrades that add value or extend the home’s life: a new roof, a finished basement, an upgraded HVAC system. Routine repairs like patching drywall or fixing a leaky faucet don’t count.4Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
If you ever claimed depreciation for a home office or a rental portion, reduce your basis by the total depreciation you deducted or could have deducted, whether or not you actually took it on your returns.5Internal Revenue Service. Publication 551 (12/2025), Basis of Assets – Section: Decreases to Basis Gain tied to that depreciation is taxed separately as unrecaptured Section 1250 gain at up to 25% federally and can’t be sheltered by Section 121.6Internal Revenue Service. 1997 Instructions for Form 4797 – Sales of Business Property Owner-occupants with no depreciation history can skip this piece.
Your taxable gain is the amount realized minus the adjusted basis. That’s the number the exclusion runs against.
What You Owe If the Gain Exceeds the Exclusion
Any gain above the exclusion is taxed as a long-term capital gain federally, assuming you owned the home more than a year. For 2026, the long-term rates are 0% up to $49,450 of taxable income for singles ($98,900 joint), 15% up to $545,500 ($613,700 joint), and 20% above that. Those brackets are based on your total taxable income for the year, not just the sale.7Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
Higher-income sellers also owe the 3.8% Net Investment Income Tax on the lesser of net investment income or the amount modified adjusted gross income exceeds $200,000 single or $250,000 joint.8Internal Revenue Service. Topic No. 559, Net Investment Income Tax Stacked with the 20% rate, that’s up to 23.8% federal on the excess gain.
New Jersey treats the excess differently. There’s no separate state capital gains rate; the gain is taxed as ordinary income under the state’s progressive brackets, which run from 1.4% up to 10.75% on income above $1 million.9NJ Division of Taxation. NJ Income Tax Rates Because it stacks on top of your other income, a large sale gain can push you into higher brackets for the year.
The Realty Transfer Fee Every Seller Pays
Income tax aside, New Jersey charges a Realty Transfer Fee on every deed conveying real property. The seller pays it, the county clerk collects it when the deed is recorded, and there’s no exclusion based on how long you lived in the home.10NJ Division of Taxation. Realty Transfer Fee
The RTF is a tiered rate expressed as a dollar amount per $500 of sale price. For a sale over $350,000:10NJ Division of Taxation. Realty Transfer Fee
- First $150,000: $2.90 per $500
- $150,001 to $200,000: $4.25 per $500
- $200,001 to $550,000: $4.80 per $500
- $550,001 to $850,000: $5.30 per $500
- $850,001 to $1,000,000: $5.80 per $500
- Over $1,000,000: $6.05 per $500
On a $500,000 home, the RTF runs roughly $2,480. Sellers who are 62 or older, blind, or disabled pay a reduced schedule at about half the standard rate.11NJ Division of Taxation. Realty Transfer Fees (RTF) Frequently Asked Questions Some transfers are fully exempt, including transfers between spouses, deeds recorded within 90 days of a divorce decree, and deeds that correct a prior recording.10NJ Division of Taxation. Realty Transfer Fee
Extra Fee on Sales Over $1 Million
Properties selling above $1 million trigger a supplemental Graduated Percent Fee on top of the standard RTF, applied to the total price rather than only the amount over the threshold:10NJ Division of Taxation. Realty Transfer Fee
- $1,000,001 to $2,000,000: 1% of total consideration
- $2,000,001 to $2,500,000: 2%
- $2,500,001 to $3,000,000: 2.5%
- $3,000,001 to $3,500,000: 3%
- Over $3,500,000: 3.5%
A seller closing at $1.5 million owes 1% of the full $1.5 million, or $15,000, plus the standard RTF. That’s a line item worth planning for well before the closing table.
The Nonresident Estimated Payment at Closing
Every seller of New Jersey real property has to file a GIT/REP form before the deed can be recorded. What you file, and whether money comes out of your proceeds at closing, depends on whether you’re a New Jersey resident at the time of the sale.12State of New Jersey – Division of Taxation. Buying or Selling a Home in New Jersey
Residents file Form GIT/REP-3, certifying residency and that any tax on the gain will be paid with the regular NJ-1040. No estimated payment comes out at closing.13NJ.gov. GIT/REP-3 Seller’s Residency Certification/Exemption
Nonresidents file Form GIT/REP-1 and must make an estimated Gross Income Tax payment at closing equal to 10.75% of the gain or 2% of the total sale price, whichever is greater.14NJ Division of Taxation. FAQs on GIT Forms Requirements for Sale of Real Property The 10.75% figure is New Jersey’s top marginal rate, applied to the whole gain regardless of what bracket the seller actually lands in.
Even a nonresident selling at a loss owes the 2% minimum. On a $600,000 sale with no profit, that’s $12,000 held from proceeds.14NJ Division of Taxation. FAQs on GIT Forms Requirements for Sale of Real Property You get it back after filing an NJ-1040NR nonresident return that shows the actual liability, but the money is tied up until the refund arrives.
A handful of exemptions listed on the GIT/REP-1 avoid the payment, including transfers between spouses and transactions with total consideration of $1,000 or less.15New Jersey Division of Taxation. Nonresident Seller’s Tax Declaration, Form GIT/REP-1 Form GIT/REP-4 covers narrower situations like Division of Taxation waivers for hardship, court-ordered transfers, and very old deeds.14NJ Division of Taxation. FAQs on GIT Forms Requirements for Sale of Real Property
About the “New Jersey Exit Tax”
Agents and sellers often call this the “New Jersey exit tax.” The label is misleading. There is no separate exit tax. The closing payment is an estimated income tax payment that gets credited against your actual NJ-1040NR liability, and any excess is refunded. If the Section 121 exclusion covers your gain, you’ll ultimately owe nothing and the full amount comes back. The trap is that many nonresident sellers don’t realize they have to file the NJ-1040NR to trigger the refund, and it can take months to arrive.
Selling an Inherited Home
Inherited property starts from a different basis. The IRS sets the basis at the fair market value on the date the prior owner died, not the original purchase price.16Internal Revenue Service. Gifts and Inheritances If a parent bought a home for $120,000 in 1985 and it was worth $550,000 at their death, your basis is $550,000. Sell it later for $575,000 and the taxable gain is $25,000, not $455,000.
The Section 121 exclusion generally isn’t available on an inherited home unless you moved in and used it as your own principal residence for at least two of the five years before selling. Without meeting that test, the gain (however small after the step-up) is taxed at capital gains rates. The GIT/REP rules apply either way, so a nonresident selling an inherited New Jersey home still makes the estimated payment at closing.
Reporting the Sale After Closing
The settlement agent may issue Form 1099-S reporting the gross proceeds to the IRS. They aren’t required to issue one if you certify in writing that the home was your principal residence and the full gain is excludable under Section 121.17IRS.gov. Instructions for Form 1099-S Proceeds From Real Estate Transactions
If you received a 1099-S, report the sale on Schedule D and Form 8949 even when the gain is fully excluded. You also must report anytime the gain exceeds the exclusion.18Internal Revenue Service. Topic No. 701, Sale of Your Home No 1099-S and a fully excludable gain means no federal reporting is required.
Hold onto the documents that support your basis and gain: closing disclosures from both the purchase and the sale, receipts for capital improvements, and any depreciation records. The IRS can ask years later, and reconstructing the numbers after the fact is harder than keeping a folder.
On the state side, residents report the gain on the NJ-1040 and apply the state’s Section 121 exclusion. Nonresidents file the NJ-1040NR, report the gain, and claim credit for the estimated payment made at closing.12State of New Jersey – Division of Taxation. Buying or Selling a Home in New Jersey If the estimated payment beat the final tax owed, the state refunds the difference. Skip that filing and you forfeit the refund, even if it’s your money.