NJ Capital Gains Tax on Real Estate

All real estate transactions in New Jersey are subject to the state’s capital gains tax, which is levied as income tax. Unlike federal-level long-term capital gain taxes, NJ income tax brackets are not dependent on how long you held the property before the sale.

Ranging from 1.4% – 10.75%, NJ’s income tax can take a large chunk out of your real estate capital gains, unless you take advantage of applicable tax relief strategies to minimize or defer the taxes. One such strategy is a 1031 exchange, which allows you to reinvest your proceeds into like-kind properties without paying immediate taxes.

At Universal Pacific 1031 Exchange, we specialize in helping investors defer capital gains taxes through 1031 exchanges. As a experienced Qualified Intermediary in New Jersey, we’ve helped several individuals, families, and businesses successfully complete 1031 exchanges while staying IRS compliant. Contact us now for a free consultation.

This article covers everything you need to know about capital gains tax in New Jersey and why it matters. It also highlights how to calculate capital gains tax and ways to reduce or defer it in your real estate transactions.

What Is Capital Gains Tax and Why Does It Matter in New Jersey?

Capital gains tax refers to the tax you pay on the profit made from selling or exchanging an asset. This profit, which is known as “capital gains,” is calculated by subtracting the adjusted cost basis of the property from the net selling price. In addition to the federal capital gains tax, New Jersey imposes its own state-level tax on all capital gains.

As such, for every property sold in NJ, you’re to pay taxes to the IRS and the state government. However, unlike the federal-level tax, the NJ capital gains tax doesn’t differentiate between long-term and short-term capital gains. This simply means that every capital gain is treated as regular income and taxed under the state’s broader income tax system. 

Having a proper understanding of this tax system and how it works can significantly affect how much you actually take home after a sale, especially with the rising property values across both residential and commercial real estate markets.

What Are the Capital Gains Tax Rates in New Jersey?

The New Jersey income tax rates range from 1.4% for the lowest earners to 10.75% on income above $1 million. This tax structure is based on your modified adjusted gross income, which includes your capital gains. As such, the state does not offer a special capital gains tax rate for long-term investments. 

New Jersey Income Tax Brackets (Tax Year 2026, Single Filers):

• 1.4% on income up to $20,000
• 1.75% on income from $20,001 to $35,000
• 3.5% on income from $35,001 to $40,000
• 5.53% on income from $40,001 to $75,000
• 6.37% on income from $75,001 to $500,000
• 8.97% on income from $500,001 to $1,000,000
• 10.75% on income over $1,000,000

Married Filing Jointly:

• 1.4% on income up to $20,000
• 1.75% on income from $20,001 to $50,000
• 2.45% on income from $50,001 to $70,000
• 3.5% on income from $70,001 to $80,000
• 5.53% on income from $80,001 to $150,000
• 6.37% on income from $150,001 to $500,000
• 8.97% on income from $500,001 to $1,000,000
• 10.75% on income over $1,000,000

Note: NJ income tax brackets have not changed since 2020 and apply to your total taxable income, including capital gains.

2026 Federal Long-Term Capital Gains Tax Brackets:

• 0% — Single: up to $49,450 | MFJ: up to $98,900
• 15% — Single: $49,451 to $545,500 | MFJ: $98,901 to $613,700
• 20% — Single: over $545,500 | MFJ: over $613,700

Plus the 3.8% Net Investment Income Tax (NIIT) may apply for higher earners, bringing the effective maximum federal rate to 23.8%.

So, whether you’re realizing profits from selling assets like real estate, stocks, or other appreciated assets, New Jersey treats those gains as ordinary income and is subject to your state income tax bracket. At the federal level, long-term capital gains from assets held for over a year may qualify for reduced rates of 0%, 15%, or 20%. 

This is dependent on your adjusted gross income, filing status (e.g., married filing jointly vs. married filing separately), and overall taxable income. Conversely, federal short-term gains are taxed at ordinary income rates of 10% – 37%. In addition, individuals who fall in higher tax brackets may be subject to the 3.8% federal Net Investment Income Tax, applicable to certain types of investment profits, such as rental income. 

Another interesting fact about the NJ tax system is that, unlike the federal government, which permits unused capital losses to be carried forward into future tax years, New Jersey tax laws do not recognize capital loss carryovers. In addition, while federal rules allow taxpayers to offset capital gains with up to $3,000 in losses in that year against ordinary income, New Jersey state taxes offer no such relief.

Consequently, losses from investment property or other asset sales cannot be used to reduce your state income tax, nor can they lower your ordinary income tax rate in any future year. This automatically increases the overall tax liability for investors trying to manage risk within their investment portfolios.

The State of New Jersey levies additional taxes on real estate, such as the exit tax, transfer tax, inheritance tax, and local property tax. On the bright side, you can claim State and Local Taxes (SALT) deductions of up to $40,000 when filing your federal tax returns. This was $10,000 until President Trump signed The One Big Beautiful Bill into law on July 4th, 2025.

How Is Capital Gains Tax Calculated on Real Estate in NJ?

In New Jersey, capital gains on real estate are calculated using a simple formula: capital gains = net sale price – adjusted basis. The adjusted basis is the sum of your original purchase price, cost of qualifying capital improvements, closing costs, minus depreciation.

On the other hand, the net sale price is the gross amount minus expenses like real estate commissions, transfer taxes, Qualified Intermediary fees, and other allowable selling costs. Please note that routine maintenance or cosmetic work doesn’t increase your basis.

For example, suppose you bought a property in New Jersey for $400,000, spent $40,000 on renovations, and later sold it for $800,000 after claiming depreciation of $30,000. If you also paid $20,000 in realtor commissions and other selling costs, your capital gains calculations are as follows:

Adjusted basis = $400,000 + $40,000 – $30,000 = $410,000

Capital gain = $800,000 – $20,000 – $410,000 = $370,000

So, your capital gain would be $370,000.

The State of New Jersey would factor this figure when taxing your ordinary income for that tax year, regardless of whether it’s a long-term investment or a short-term gain. On the federal level, if you owned the property for over a year, you may qualify for lower long-term capital gains rates, and possibly even exclude up to $250,000 or $500,000 if married filing jointly.

However, this is only possible if the property was your primary residence and you lived there for at least two of the past five years. It’s also noteworthy that NJ capital gains tax does not apply to funds in tax-advantaged accounts, such as 401(k) and Health Savings Account (HSA).

Can You Deduct Real Estate Commissions from Capital Gains?

Yes, you can deduct real estate commissions from capital gains when calculating your taxable gain on the sale of a property. Commissions paid to real estate agents or brokers are considered part of the selling expenses, and these can significantly reduce capital gains taxes owed. 

Other deductible transaction-related costs are legal fees, transfer fees, QI fees, and escrow charges. Endeavor to subtract them from the sale price before calculating your capital gain to reduce your tax liability at the federal and state levels.

Can I Exclude Capital Gains When Selling My Primary Home in NJ?

Yes, you can exclude capital gains when selling your primary home in New Jersey, but the exclusion comes from federal tax law, not the state. Under Section 121 of the Internal Revenue Code, if the home was your primary residence for at least two of the five years before it was sold, you may qualify for up to $250,000 of capital gains exclusion if you’re single, or up to $500,000 if you’re married filing jointly. 

This federal exclusion significantly reduces or even eliminates your federal capital gains tax liability on the sale. Fortunately, the State of New Jersey honors this tax relief, allowing you to exclude qualified gain from your New Jersey state tax income. However, if the gains exceed the allowed federal exclusion, the remaining amount is subject to both federal and state taxes.

What Is the NJ Real Estate Withholding Tax for Sellers?

When you sell real estate in New Jersey and you’re a non-resident, the state will charge you a withholding tax, officially known as the New Jersey Non-resident Gross Income Tax Withholding, or simply, “NJ Exit Tax.” This tax is 8.97% of your net gain or 2% of the total sale price, whichever is greater. 

Unless you officially request waivers or exemptions in qualifying situations, you’re mandated to pay the tax even if you sold at a loss. This tax applies at closing and is reported via the GIT/REP-1 form to the Division of Taxation.

As the name suggests, the tax is an estimated gross income tax payment, which ensures that New Jersey collects at least a portion of the capital gain before you file a regular state income tax return. However, residents of the state can skip this withholding by completing and submitting the GIT/REP-3 form.

The gain should also be reported on your annual NJ-1040 return. Non-residents can receive refunds on the excess sum paid in the withholding tax at the end of the tax year.

Key points about the NJ Exit Tax:

• The withholding is not an additional tax — it is an estimated prepayment of your NJ income tax liability on the gain.
• If you are a NJ resident moving out of state, you are treated as a nonresident for the sale and must pay the withholding at closing.
• Sellers who owe less than the withheld amount can file a NJ nonresident return (NJ-1040NR) to claim a refund of the overpayment.
• Sellers who owe more than the withheld amount will owe additional NJ income tax when filing.
• Exemptions may apply for certain transactions, including transfers between spouses, transfers to trusts, and sales where the property was the seller’s principal residence and qualifies for the federal Section 121 exclusion. The GIT/REP-3 and GIT/REP-4 forms are used for resident and partial exemptions, respectively.

Important: NJ Depreciation Adjustment (GIT-DEP)

New Jersey has different depreciation rules than the federal government. If you claimed accelerated depreciation (such as bonus depreciation or Section 179 deductions) on your federal return, NJ may require you to add back those deductions and use the state’s own depreciation schedule. This is reported on the GIT-DEP worksheet filed with your NJ-1040 return. The difference between federal and NJ depreciation can significantly affect your adjusted basis and, consequently, your taxable capital gain at the state level. Real estate investors should work with a tax professional familiar with NJ depreciation rules to ensure their cost basis is calculated correctly for both federal and state purposes.

How Can I Reduce or Avoid Capital Gains Tax on Real Estate in NJ?

One way to make the most of your investment returns and secure your financial future is to cut your tax liabilities to the barest minimum. These are proven strategies to reduce capital gains taxes on the state and federal levels for your assets held in New Jersey.

• Use 1031 Exchange: This is a powerful tax-deferral strategy that helps you rollover the proceeds from the sale of a real estate asset into a like-kind investment property without paying immediate taxes on the gains. This is especially beneficial for real estate investors in NJ seeking to build equity while deferring taxes. However, you need to work with an experienced Qualified Intermediary to support the success of the exchange.
• Primary Residence Exclusion: As discussed earlier, this exclusion allows you to exclude up to $250,000 as a single individual or up to $500,000 if married filing jointly. The major requirement is that you must have lived in the property for two out of the last five years. Also, you must not have used this same strategy to exclude capital gains taxes in the last two years.
• State and Local Taxes (SALT) Deductions: The newly signed One Big Beautiful Bill allows you to claim up to $40,000 in federal tax deductions when you pay the same amount or less in state-level taxes. That means any tax you pay in your state, up to $40,000, can be written off when you file your annual federal tax returns.
• Hold the Property for Over a Year: Although there are no reduced tax rates for holding a property for more than a year in New Jersey, doing so can qualify you for lower federal taxes. You can also deduct capital losses from other investments to offset gains, which lowers your federal taxable income. 
• Sell the Property During a Lower-Income Year: Another way to minimize capital gains tax is to sell the assets in a year you earned less. This will help you stay in a lower tax bracket. While doing this, endeavor to keep detailed records of capital improvements such as structural upgrades, additions, or major repairs that can increase your cost basis, and effectively reduce your tax burden. 
• Consult a Tax Professional: This is important since the rules governing capital gains taxes, tax deductions, and real estate transactions are complex. They can help you evaluate your investment strategy, prepare required documents, and identify which tax regulations apply to your situation.

How Can I Defer Capital Gains Tax With a 1031 Exchange in NJ?

You can use a 1031 exchange to defer capital gains tax in New Jersey by reinvesting the proceeds from the sale of one investment property into another like-kind property in line with the provisions of IRC Section 1031.

One basic requirement for a 1031 exchange is that both the relinquished and the replacement properties must be held for business or investment purposes, and not for personal use. However, to fully defer taxes and avoid taxable boot, you must ensure that the replacement property is of equal or greater value to the relinquished property.

This is important because any cash or item you receive during the exchange other than the identified property will open you to immediate tax liabilities. You must also note that the IRS will not consider the exchange valid without the presence of a Qualified Intermediary (QI).

The QI is responsible for not just holding funds but for facilitating the entire exchange process. Furthermore, the IRS outlines strict timelines by which an exchange can be carried out. First, you are given 45 days from the property sale date to identify potential replacement properties.

Then, you have a total of 180 days from the same date to close the deal on the new property. Please note that failing to meet these timelines could lead to the disqualification of the exchange, thereby resulting in tax implications.

What Types of Properties Qualify for a 1031 Exchange in NJ?

As earlier discussed, only properties that meet the like-kind requirement of the IRS can qualify for 1031 exchanges in New Jersey. This simply means properties held for investment or productive use in trade or business. Hence, primary residences, second, or vacation homes used for personal enjoyment, and flipped properties do not qualify, unless they are converted to rental properties.

However, residential properties like duplexes, triplexes, and single-family rentals qualify for a 1031 exchange. In the same vein, commercial buildings such as office spaces, retail centers, and warehouses are also eligible.

Other properties, such as vacant land held for investment, multifamily apartment complexes, industrial properties, mixed-use properties, and leasehold interests with 30 years or more remaining, also qualify for a 1031 exchange.

Can You Use a 1031 Exchange to Buy Property Outside of NJ?

Yes, you can use a 1031 exchange to buy property outside of New Jersey, as long as both the property sold and the one purchased are located within the United States and meet the necessary IRS requirements. Although the 1031 exchange rules are enacted at the federal level, they are applicable in New Jersey for deferring federal capital gains tax and state income tax. 

When you exchange a like-kind property, the gain from the sale of your New Jersey property is deferred, not eliminated. This means that you won’t pay the ensuing taxes until you sell the replacement property in a taxable transaction. 

However, it is important to consider state-level nuances when performing an out-of-state 1031 exchange. Working with a tax professional and Qualified Intermediary familiar with both 1031 exchanges and New Jersey tax laws can help ensure compliance and maximize your tax benefits.

Is a 1031 Exchange the Right Tax Strategy for You?

A 1031 exchange can be a powerful tax strategy, but it’s not the right fit for everyone. Utilizing a 1031 exchange is dependent on your needs and long-term investment goals. It is particularly useful for real estate investors looking to grow or shift their real estate portfolio without triggering an immediate tax liability. 

However, it is not ideal if you need access to the cash from your sale or plan to downsize, as any amount you don’t reinvest becomes taxable boot. Moreover, a 1031 exchange follows very strict rules and timelines, and so if you’re unable to adhere to them, then it’s advisable not to initiate the exchange.

Also, as stated above, not all properties qualify for a 1031 exchange. If your property doesn’t meet the IRS requirement of like-kind, you cannot conduct the exchange. Consulting with a tax advisor or reputable Qualified Intermediary can help you evaluate your situation and avoid costly decisions.

Want to Defer Capital Gains Taxes in NJ?

Navigating capital gains taxes in New Jersey real estate can feel overwhelming, especially with the state’s complex tax structure. But using tools like a 1031 exchange, you can reinvest and grow your portfolio without triggering immediate tax bills.

All you need for a successful tax-deferred exchange is a trustworthy Qualified Intermediary that understands the local NJ tax laws. Universal Pacific 1031 Exchange has decades of experience helping New Jersey investors handle exchanges smoothly and deferring capital gains taxes.

From offering tax advice to facilitating the exchange process, we make sure your capital keeps working for you without looking over your shoulders for the IRS. Contact us to speak with an expert or visit our 1031 exchange office to start your exchange today.

Accuracy & Sources Disclaimer

The information in this article is sourced from official government publications and is accurate to the best of our knowledge as of the date of last update: 3/26/2026. All claims can be independently verified through the sources listed below:

Federal Sources:

• 26 U.S.C. § 1031 — Internal Revenue Code, Section 1031
• IRS Like-Kind Exchanges Under IRC Section 1031
• IRS Topic No. 409 — Capital Gains and Losses
• IRS Topic No. 503 — Deductible Taxes (SALT)
• IRS Topic No. 701 — Sale of Your Home
• IRS Publication 523 — Selling Your Home
• IRS Net Investment Income Tax (NIIT)
• Treasury Regulation § 1.1031(a)-1 — Like-Kind Exchange Requirements
• The One Big Beautiful Bill — White House

New Jersey State Sources:

• NJ Division of Taxation — Income Tax Rate Schedules
• NJ GIT/REP-1 — Nonresident Seller’s Tax Declaration
• NJ GIT/REP-3 — Resident Seller’s Tax Declaration
• NJ-1040 — Resident Income Tax Return Instructions
• NJ Division of Taxation — Realty Transfer Fee Schedule
• NJ Division of Taxation — Inheritance and Estate Tax

Tax laws are subject to change at both the federal and state level. This content is for informational purposes only and does not constitute tax, legal, or investment advice.

FAQs

We’ve provided answers to some of the frequently asked questions investors and enthusiasts ask about New Jersey’s capital gains tax on real estate.

Can You Do a 1031 Exchange for Out-of-State Property?

Yes. As long as both properties are in the US and used for investment or business. That means you can sell in New Jersey and reinvest in another state (and vice versa) while deferring both federal and state capital gains taxes.

Is There a Capital Gains Tax in New Jersey on Home Sales?

Yes, but if the home is your primary residence, you may qualify for the Section 121 federal exclusion of up to $250,000 ($500,000 if married filing jointly). While New Jersey generally honors this exclusion, gains that exceed the stipulated amount that can be excluded are taxed.

How Much Is the NJ Real Estate Withholding Tax?

For nonresidents, New Jersey withholds either 2% of the sale price or 8.97% of the gain, whichever is greater. This applies at closing and is reconciled when you file your NJ return.

Do I Have to Pay Both the NJ and Federal Capital Gains Tax?

Yes, you are expected to pay federal capital gains tax based on the holding period, and New Jersey taxes the full gain as ordinary income, regardless of how long you held the property.

Can I Defer NJ Capital Gains Tax Through a 1031 Exchange?

Yes. A well-structured 1031 exchange allows you to defer New Jersey state income tax on your capital gain, along with the federal tax. This is as long as you meet all IRS rules. This includes reinvesting the full proceeds into a like-kind investment property, identifying the replacement property within 45 days, and closing within 180 days.

What if I Move Out of State Before Selling My NJ property?

If you’re a nonresident at the time of the sale, New Jersey will likely withhold 8.97% of the gain or 2% of the sale price at closing. This is often called the New Jersey exit tax, though it’s technically a prepayment of your state income tax. You’ll reconcile this when you file your NJ return. 

How Much Is Capital Gains Tax on Real Estate in NJ?

New Jersey taxes capital gains as ordinary income, with rates from 1.4% to 10.75% based on your total income. Unlike the federal government, NJ doesn’t offer any special rate for properties held long-term.

How Do I Avoid Capital Gains Tax When Selling a House in NJ?

If the NJ house was your primary residence, and you lived in it for at least two of the past five years, you may qualify for the federal exclusion. To minimize or avoid capital gains tax on investment property, you can use strategies like tax loss harvesting, increasing your cost basis with documented improvements, or completing a 1031 exchange to defer the gain altogether.