CPA Services for NJ Real Estate Investors & Landlords

Frequently Asked Questions

Can I deduct rental property losses against my W-2 income?

It depends on your income level. If your adjusted gross income (AGI) is under $100,000 and you actively participate in managing your rental, you can deduct up to $25,000 of rental losses against ordinary income. This allowance phases out between $100,000 and $150,000 AGI and disappears completely above $150,000. Above that threshold, rental losses are passive and can only offset passive income unless you qualify as a real estate professional under IRC §469(c)(7), which requires spending more than 750 hours per year in real estate activities.

How does a 1031 exchange work and when should I use one?

A 1031 like-kind exchange (IRC §1031) lets you defer capital gains tax when you sell investment real estate, as long as you reinvest the proceeds into another qualifying property. The rules are strict: within 45 days of closing, you must identify potential replacement properties. Within 180 days, you must close on the replacement. All proceeds must go through a qualified intermediary. You cannot touch the cash. Boot (cash or non-like-kind property received) is taxable. A 1031 exchange is most valuable when you have a large unrealized gain and plan to continue holding real estate long-term.

How does NJ tax real estate capital gains differently from federal?

Significantly differently. Federal law taxes long-term capital gains at preferential rates (0%, 15%, or 20% depending on income). New Jersey taxes capital gains as ordinary income at rates up to 10.75%. Additionally, NJ does not allow capital loss carryforwards. If you have a capital loss in NJ, it can only offset gains in the same year. This makes NJ capital gains tax on real estate sales one of the most expensive state taxes in the country.

What is the NJ exit tax and how do I avoid it?

The NJ exit tax is a withholding mechanism applied when non-NJ residents sell New Jersey real estate. At closing, 2% of the total sales price (not the gain. The full price) is withheld and remitted to NJ. NJ residents selling NJ property have a separate estimated tax payment requirement based on 10.75% of estimated gain. You can claim an exemption or reduction using Form A-3128 if your estimated NJ tax liability is less than the withheld amount. For investment property sold by a non-resident, the 2% withholding on the full sales price frequently exceeds the actual NJ tax on the gain.

Should I hold rental properties in an LLC?

An LLC provides liability protection that a personally-held property does not. If a tenant sues and gets a judgment, the LLC structure generally limits their recovery to LLC assets. For tax purposes, a single-member LLC is a disregarded entity: the income and expenses flow directly to your personal return (Schedule E) exactly as if you owned the property individually. Multi-member LLCs are taxed as partnerships (Form 1065). The liability protection is real; the tax treatment is unchanged. For NJ, LLCs are subject to the NJ minimum filing fee, which starts at $150/year.

What is cost segregation and is it worth it for a rental property?

Cost segregation is a tax strategy that involves hiring an engineer to break down a building's components into categories that depreciate faster than the standard 27.5-year (residential) or 39-year (commercial) timeline. Land improvements, fixtures, and certain building components may qualify for 5-year, 7-year, or 15-year depreciation, dramatically accelerating deductions in the early years of ownership. Cost segregation studies typically cost $5,000-$15,000 and are most cost-effective for properties with a purchase price of $500,000 or more. The deduction in year one can often be 10-20% of the property's depreciable basis.