Capital Gains On The Sale Of Real Estate And The Stepped-Up Basis
Dec. 17, 2022
In New Jersey, capital gains on the sale of real estate are taxed at the state level. Capital gains are the profit that is realized from the sale of a capital asset, such as real estate. Capital gains are calculated by subtracting the cost basis of the property from the sale price.
The cost basis of a property is the original purchase price of the property, plus any capital improvements made to the property over the years, minus any depreciation that has been taken. Capital improvements are any additions or improvements to the property that increase its value, such as a new roof or an addition to the house. Depreciation is a tax deduction that is allowed for the wear and tear of a property over time.
For example, if a person purchases a piece of real estate for $100,000 and sells it for $200,000, their capital gain on the sale would be $100,000 (the sale price minus the cost basis). If the person had made $20,000 in capital improvements to the property and taken $10,000 in depreciation, their cost basis would be increased to $110,000, and their capital gain would be $90,000 ($200,000 sale price minus $110,000 cost basis).
Capital gains on the sale of real estate in New Jersey are taxed at the state's income tax rate. The income tax rate in New Jersey varies depending on the amount of income that is earned. For 2021, the income tax rates in New Jersey range from 1.4% to 10.75%.
On the other hand, the stepped-up basis is a concept in tax law that applies to the transfer of real property, such as real estate, upon the death of the owner. The stepped-up basis refers to the increase in the value of the property for tax purposes as a result of the owner's death.
Under the federal tax code, when a person dies and transfers ownership of their real estate to another person, the recipient of the property (the heir or beneficiary) receives a "stepped-up" basis in the property. This means that the recipient's basis in the property is equal to the fair market value of the property at the time of the owner's death.
For example, if a person owned a piece of real estate that they purchased for $100,000 and the fair market value of the property at the time of their death was $200,000, the recipient of the property would receive a stepped-up basis of $200,000. If the recipient later sells the property for $200,000, they would not owe any capital gains tax on the sale, because their basis in the property is equal to the sale price.
The stepped-up basis rule applies to transfers of real property in all states, including New Jersey. It is important to note that the stepped-up basis only applies to real property, and not to other types of assets such as stocks or personal property.
It is a good idea to consult with a tax professional or an attorney to understand the tax implications of transferring real estate in New Jersey and to help ensure that you are in compliance with the state's tax laws.