I am a resident in NJ. I sold a rental property in Ohio. Do I need to pay NJ income tax on the capital gain associated with the sale of my Ohio rental property?

[borrong03082014]

I am a NJ resident. I sold a rental property in OH. I filed both NJ resident state tax and OH non-resident state tax. 

Q1: Is the capital gain associated with my OH rental property sale exempt from NJ state tax? I did report rental activities in my previous Federal, NJ, and OH tax filings.

Q2: The capital gain associated with my OH rental property sale is solely due to depreciation recapture (the OH rental property sale proceed net of sale expenses such as commissions is less than the original property purchase price). I also have a cumulative loss carried forward on this rental property, but when I use Turbo Tax to file NJ state tax return, the cumulative loss carried forward is not used to offset the capital gain associated with the OH rental property sale. Turbo Tax indicates the cumulative loss will be carried forward to 2019 even I sold OH rental property in 2018.

Your kind guidance is greatly appreciated! 

[DanielV01 · Accepted solution]

Q1:  It is not exempt, unless NJ decides to exempt it under their state income tax laws.  As your resident state, NJ has the right to tax all of your income regardless of where it comes from.

Q2:  That is how NJ treats this income.  They are not allowing you to claim a loss this year, which could be because of your overall income.  If this is the case, it is carried forward to the next year that you can claim it.  It is not lost, but it is suspended.

[borrong03082014]

Thanks for your response, Turbo TaxDanielIV!

Two follow up questions:

(a). I plan to move out of NJ in 2019, so I will file NJ tax one more time in 2010 for 2019 tax filing. If I still can't claim the OH rental property cumulative loss carried forward next year per Turbo Tax calculation (e.g., due to overall income limit), does it mean I will lose that cumulative loss carried forward forever as I will not file the NJ tax post 2010?

(b). Should my OH rental property sale (again I am a non-resident in OH) be treated as "Sale of Business Property" or "Sale of Home" or both? In Turbo Tax under Federal - Wages and Income section, the capital gains associated with my OH rental property sale currently shows up as both "Sale of Business Property" and "Sale of Home". Is that correct? I did receive steady and consistent rental incomes in the past few years from my OH rental property, which is not my residence as I have not lived in OH for years Also, I did not pass the living in that property for 2 years out of past 5 years requirement.

[DanielV01]

If you lived in that home 2 of the last 5 years, it can be both, because it can count for the Home Exclusion, but still have depreciation recapture.  I don't know with any certain how New Jersey will treat your loss through 2019.  I'm sorry I can't help you further on that.

[borrong03082014]

Thanks again! Since I did not live 2 of the last 5 years (however, I sold the OH property due to job change, and I moved to NJ), should it still be treated as both "Sale of Business Property" and "Sale of Home"? If not, which one should it be?

Regarding the OH property cumulative loss carry forward, I thought it would be fully reflected at time of property sale, but it is not reflected in NJ state filing per Turbo Tax calculation.

Thank you for the help!

[DanielV01]

A sale of a rental home on the Federal return is considered a sale of Section 1250 business property.  It is reported on Form 4797 and then Schedule D.  That is where the depreciation recapture comes into play.