I live in NJ but work in NY, so I file NY and NJ state returns. I also sold a house in MD. Since that house was rented for a year when I did not live there, I need to pay taxes on a portion of the capital gain I made reselling it.

My understanding is that since the house was in MD, though I did not live in MD and had no income there, I need to pay state taxes on the percentage of the capital gain that is federally taxable (instead of adding it to my NJ income).

Am I correct? Do I have also to file MD taxes?

  • To which state were you paying the taxes you earned from the rental?
    – binarymax
    Commented Mar 21, 2018 at 20:28

2 Answers 2

  1. Be aware that if you lived in the house for 2 of the last 5 years, you may deduct $250,000 on your capital gains ($500,000 if married and you both lived there).

  2. If you have claimed depreciation on this property in the last five years, that will be treated as income, which will mean paying both New Jersey and Maryland income tax. You should be able to deduct all Maryland income tax paid from your New Jersey income tax.

  • Even if I lived for 2 of the last 5 years, if the house was rented at all for any period, you need to pay a percentage of those capital gains equal to the percentage of the time it was rented vs the time owed. For example, if I owned it for 10 years and rented for a year, and the capital gain is 50,000, 5,000 is taxable. So, #1 in your answer is actually incorrect.
    – user
    Commented Feb 19, 2018 at 1:12
  • 2
    @user can you cite that? Commented Feb 19, 2018 at 4:26
  • @user IRS Publication 523 does not mention anything about rental property in regards to the usability and residence tests. See irs.gov/publications/p523#en_US_2017_publink100011707
    – Magua
    Commented Feb 19, 2018 at 19:42
  • @Magua A rental property is an investment, not your main residence. The $250,000 can be used for your main residence, not for a rental.
    – user
    Commented Feb 19, 2018 at 19:52
  • 1
    That is new information to me, and so did some more digging. Section 121 ( law.cornell.edu/uscode/text/26/121 ) went into effect January 1, 2009, and changed what could be qualified; that's the reason for your 4797 citation. Section 121(b)(5)(C)(ii)(I) specifically exempts any portion of the previous five years after the last time the owner lived there from being considered nonqualified for the purposes of the $250,000/$500,000 deduction..
    – Magua
    Commented Feb 20, 2018 at 1:38

Go through the process of determining if the gain is taxable on the federal forms. Even if there is no gain, there is likely to be a recapturing of the depreciation from the time the property was a rental property.

Then see if those lines/schedules transfer to the Maryland forms. I suspect they do. If so, you will have to file a final tax form in Maryland. The state of Maryland wants their portion because it is Maryland sourced income. They don't want that money to go to NY or NJ.

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