Military member selling home in NJ, TAX question?

2 Replies

Hey everyone,

I am a investor with experience in SC, NC, & TN. I have a fair deal of experience with the real estate laws/codes in those states, but I have a colleague ask for advice today and I am hoping that you can help. Bottom line, he is selling a once primary residency home in NJ, but is not a resident of NJ due to active duty military commitment/mandatory moves. He will not have to pay federal capital gains tax because of the "Military Family Tax Relief Act" because 10 yrs period has not expired. His "gain" on the sale is zero, but I have no advice when it comes to NJ sales/income tax. Can someone help?

"Any advice you can offer about how to alleviate a New Jersey non-resident income tax payment would be appreciated.

I am active duty military stationed in North Carolina. In 2006, my wife and I purchased a home in Pemberton, NJ while on active duty in McGuire AFB, NJ. In 2011, I received orders to move to Washington, D.C., followed by another move to North Carolina in 2015. From May 2011 to May 2017, the home was always rented and we never used it as a principle residence. We did not own homes in DC or NC.

We sold and closed on the home last week. Our original purchase price in 2006 was $275k, but we sold in 2017 for $248k. NJ tagged an additional 2% non-resident income tax on the sale price $248k; almost
$5k tax. I am an Ohio resident and pay state income tax there. My wife is a Florida resident for tax purposes, but FL does not have a state tax. We have never been an NJ resident and never paid NJ taxes
even when stationed there 2006-2011.

Is there anyway to get a refund on the NJ $5k tax? Additionally, any recommendations for a good CPA in NJ with experience handling out-of-state military tax issues?"

I really appreciate your time to help with this question.

@Frank C.

First of all, 

Thank you for your service!

Not sure if you're still looking for advice for your colleague in terms of NJ taxation and residency status. Here's what I found in NJ tax filing instructions, "...Guidelines for Military Personnel Residents. A member of the Armed Forces whose home of record (domicile) is New Jersey when entering the service remains a resident of New Jersey for income tax purposes, and must file a resident return even if assigned to duty in another state or country, unless he or she qualifies for nonresident status (see chart on page 1). If you are a New Jersey resident, you are subject to tax on all your income, including your military pay, regardless of where it is earned, unless the income is specifically exempt from tax under New Jersey law. A member of the Armed Forces whose home of record is New Jersey and who is stationed outside the State (whether living in barracks, billets, apartment or house) and does not intend to remain continued outside New Jersey, continues to be a resident and must file a resident return and report all taxable income. However, if a serviceperson pays for and maintains facilities such as an apartment or a home outside of New Jersey, with the intent of remaining there permanently and beyond the person’s tour of duty, such facilities will constitute a permanent home outside of New Jersey. In this case, the serviceperson is no longer domiciled in New Jersey and generally is not considered a New Jersey resident for tax purposes. Nonresidents. A member of the Armed Forces whose home of record (domicile) is outside of New Jersey does not become a New Jersey resident when assigned to duty in this State. A nonresident serviceperson’s military pay is not subject to New Jersey income tax and he or she is not required to file a New Jersey return unless he or she has earned income from New Jersey sources other than military pay. A nonresident serviceperson who has income from New Jersey sources such as a civilian job in off-duty hours, income or gain from property located in New Jersey or income from a business, trade or profession carried on in this State must file a New Jersey nonresident return, Form NJ-1040NR. If your permanent home (domicile) was New Jersey when you entered the military, but you have changed your state of domicile or you satisfy the conditions for nonresident status (see chart on page 1), then your military pay is not subject to New Jersey income tax. Contact the finance officer at your station for Form DD-2058-1 to stop future withholding of New Jersey income tax. If New Jersey income tax was erroneously withheld from your military pay, you must file a nonresident return (Form NJ-1040NR) to obtain a refund of the tax withheld..." 

So it is essential for your colleague to determine their residency status based on NJ filing rules and then take it to the next step to see whether there're any breaks for non-residents on sale of a house.  

I don't know a good CPA I could recommend, but search here on BP for CPA in NJ and see if you can reach out to them. 

If I can be of any further assistance feel free to PM any time.

Best of luck! 

@Frank C.

The 2% "tax" on the sale price of the NJ home is really a withholding collected at settlement to be used to pay the capital gains tax due on the sale by a non-resident.  One further assumption here is that your friend's spouse is also military and had no income in NJ except military pay.  

Another assumption here is that your friend's adjusted cost basis (purchase priice plus improvements minus depreciation) is less than the net sale price.  In this instance, when your friend files a NJ non-resident income tax return showing no taxable income from the state of NJ, all of the withholdings should be refunded.  Make sure your friend declares the 2% as prepaid taxes.  

However, even though both spouses' income was only from military pay while living in NJ, if the adjusted tax basis for the NJ property is less than the net sale price, there is taxable capital gain earned in the state of NJ.  That tax can be offset by the 2% withholdings and some refund may be due.