Do I have to pay the exit tax after providing residence at a loss?

Q. I am advertising a property in New Jersey which was acquired in 2004 at the price of $780,000. I paid off the complete mortgage. The property has been rented out for six several years, and it just sold for $755,000. I was directed to shell out a non-resident tax of $15,000. Do I have to spend that presented that I offered the home at a $25,000 loss?

— Vendor

A. The exit tax is not a individual tax, but rather it is an estimated tax paid on the sale of a residence.

The condition instituted the tax so non-inhabitants would file a ultimate point out tax return and not skip out on paying what they owe on a home sale.

We’re heading to assume this dwelling was your major residence when you obtained it, and when you moved out six decades ago, you converted it into a rental assets.

Rental properties are allowed to just take a depreciation deduction from rental income, mentioned Bernie Kiely, a certified monetary planner and licensed public accountant with Kiely Funds Administration in Morristown.

He explained depreciation is an acknowledgment that although you are gathering rental profits, the underlying framework is growing older away.

“The depreciation deduction shelters element of your rental income from taxation,” he claimed. “This tax savings is to compensate the owner for the wear and tear that the construction, not the land, is going through.”

The downside of a depreciation deduction is even though you are conserving taxes, your tax foundation is remaining lessened by the depreciation deduction, he mentioned.

Kiely assumed that your improvements were 80% of the unique acquire value and the land was 20%. This means that $624,000 was issue to depreciation, he stated.

Less than current tax guidelines, you would have taken $135,200 in accrued depreciation concerning the years 2105 and 2020. That means your adjusted tax foundation is $644,800 ($780,000 – 135,200 = $644,800), which offers you a taxable achieve of $110,200, Kiely reported.

What takes place is you now say “I did not depreciate the assets?”

“The terms in the Inside Profits Code are your basis is modified by the depreciation `allowed or allowable,’” he explained. “This usually means even if you did not just take the depreciation deduction, you will have to nonetheless regulate your tax basis downward.”

The $15,000 that was withheld at closing represents 2% of the income selling price. You will have to pay out both of those federal and New Jersey taxes on the $110,200, Kiely claimed.

E-mail your concerns to Talk [email protected].

Karin Price tag Mueller writes the Bamboozled column for NJ Progress Media and is the founder of Stick to NJMoneyHelp on Twitter @NJMoneyHelp. Come across NJMoneyHelp on Facebook. Signal up for’s weekly e-e-newsletter.

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