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taxmanrog, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 483
Experience:  Licensed CPA, MA, MST with 31 years' experience. Teach Accounting and Tax courses at Masters level.
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A taxpayer & his wife, who reside in PA, sell a NJ investment

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A taxpayer & his wife, who reside in PA, sell a NJ investment property in 2004. There is a gain of 586k, which is deferred under Section 1031 for Federal tax purposes. The gain is reported on both the 2004 PA & NJ returns & the taxpayers receive credit on their PA return for the taxes paid to NJ. The couple purchases another investment property a few months later (also in NJ). The couple sells the second investment property in 2012. There is a loss on the sale. However, after adding back the deferred Federal gain of 586k (per above) the result is a gain, which I reported on Federal Schedule D. Since the previous gain of 586k was reported on the 2004 NJ & PA returns, how would I record the 2012 sale on the PA & NJ returns (please note 2% NJ tax was withheld at settlement but has since been refunded, as I filed Form A-3128 with the state of NJ).
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It is not unusual that an individual has a different basis for Federal and State purposes. Many states do not use the same depreciation methods, some do not allow the Homeowner's exemption, or, as in your case, §1031 exchanges. Many states, including New Jersey, put in exceptions to the like-kind exchanges, because too many people were giving up property in New Jersey, where the tax rate is fairly high, and replacing it with property in other states where the tax rates are lower. These are often referred to as "claw-back" provisions.

I called a friend of mine at the NJ Department of Revenue. She told me that gains and losses are reported on Line 57 of the Form NJ-1040NR. The information is taken off the Federal Form 8949, with the exception that the basis information, which is reported in column E, is your adjusted basis FOR NEW JERSEY PURPOSES. It is NOT your Federal basis.

Normally, this adjustment is calculated as a depreciation adjustment on the Gross Income Tax Depreciation Adjustment Worksheet GIT-DEP, however in your case, there is no line or provision for reporting different basis due to the §1031 Like-Kind Exchange.

I would therefore make a careful calculation for your records, so if the NJ Revenue Department should ever question the amount (which is unlikely in the first place) you will have ample evidence of the correctness of the calculation.

I hope this answers your questions! If you have any more, please feel free to ask! If you have found my answer helpful, please rate me highly! I would appreciate it!

Thanks! Have a great week!

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