← All services

Tax strategy for real estate investors in New Jersey and New York

By Claud Cornetti, CPA · Licensed in New Jersey and New York

Updated 19 October 2026

How is a rental property depreciated?

You recover the cost of the building over time, not in the year you buy it. Residential rental property is depreciated over 27.5 years and commercial property over 39 years, straight line, starting in the middle of the month it goes into service. Land is never depreciated.

That's why the purchase price split matters. Only the building portion is depreciable, so the split between land and building sets every depreciation deduction for decades. It's generally based on fair market value, and if that isn't known, on the ratio in the property tax assessment.

When is cost segregation worth it?

A cost segregation study is an engineering analysis that breaks the building into its parts. Some of those parts have much shorter lives: appliances, carpeting and furniture in a residential rental can be 5-year property, and land improvements such as fences, paving and landscaping are 15-year property. Shorter lives mean larger deductions in the early years.

The 2026 bonus depreciation rules make this more relevant. Under Pub. L. 119-21, property acquired after January 19, 2025 can qualify for 100% bonus depreciation, and that now applies permanently. Property acquired before January 20, 2025 and placed in service in 2026 gets 20%. Bonus depreciation only reaches the components with lives of 20 years or less, not the building itself.

Whether a study pays for itself depends on the building's cost, how long you plan to hold it, whether you can actually use the deductions under the passive loss rules, and what the study costs. If you bought the property in an earlier year, a study can still help. You file Form 3115 to change your depreciation method and take the missed depreciation as a single catch-up adjustment, without amending old returns.

Does New Jersey follow the federal depreciation?

No. New Jersey's gross income tax doesn't allow federal bonus depreciation, and it caps the Section 179 deduction at $25,000. Anyone who takes bonus depreciation or a large Section 179 deduction federally has to adjust it on the New Jersey return using worksheet GIT-DEP.

In practice, you keep two depreciation schedules for the same property, one federal and one for New Jersey. Your New Jersey basis, and so your New Jersey gain when you sell, will differ from the federal figures. That difference should be tracked from the first year, not rebuilt at the sale.

Can I use my rental losses?

Rental losses are generally passive. They offset only passive income, and unused losses carry forward until you sell the whole property in a taxable sale to an unrelated buyer. Owners who actively participate get an exception: up to $25,000 of rental losses can offset other income. It shrinks by 50 cents for every dollar of modified AGI above $100,000 and is gone at $150,000. Those figures aren't indexed for inflation.

Real estate professionals can treat rental losses as nonpassive. To qualify, more than half of your working hours, and more than 750 hours a year, must go to real property businesses in which you materially participate. On a joint return, one spouse has to meet the test alone. You also have to materially participate in each rental, or elect to treat them as one activity. Short-term rentals work differently: if the average guest stay is 7 days or less, the property isn't a rental activity under these rules, and losses can be nonpassive if you materially participate.

New Jersey doesn't use the federal passive rules, but a net rental loss can't reduce your wages there either. Schedule NJ-BUS-2 gives only limited relief across business income categories.

How do I sell without a large tax bill?

Start before the property is listed. A 1031 exchange lets you defer the gain if you reinvest in other real estate held for investment or business use, within strict 45-day and 180-day deadlines. Read how the 45-day and 180-day deadlines work.

Without an exchange, part of the gain is taxed as recapture. Depreciation on the building is taxed at up to 25% as unrecaptured Section 1250 gain. Personal-property components from a cost segregation study, such as appliances and carpeting, are taxed as ordinary income up to the depreciation you took. Land improvements are taxed like the building, except that depreciation above the straight-line amount, including bonus depreciation, is ordinary income. The rest of the gain is a capital gain. The 3.8% net investment income tax can apply to the whole gain. That's why cost segregation and the exit plan should be decided together.

What happens when I sell New Jersey property?

A nonresident who sells New Jersey real estate generally has to make an estimated income tax payment at closing under N.J.S.A. 54A:8-8 through 8-10. The payment is the gain times New Jersey's top rate, currently 10.75%, but not less than 2% of the sale price, and it's filed on Form GIT/REP-1. It's a prepayment, not the final tax: you file a New Jersey nonresident return for the year and settle the actual amount. Residents and some exchanges claim an exemption on Form GIT/REP-3.

The seller also pays New Jersey's realty transfer fee. Since July 10, 2025, under P.L. 2025, c.69, an additional graduated fee on certain sales over $1 million is imposed on the seller rather than the buyer, at a single rate from 1% to 3.5% applied to the full price. Both belong in your net proceeds before you price the deal.

I own property in both states. Where do I pay tax?

Rental income is taxed where the property sits, and your home state taxes it too, with a credit. A New Jersey resident with a New York rental files a New York nonresident return (Form IT-203) and claims a credit on New Jersey's Schedule NJ-COJ. A New York resident with a New Jersey rental files Form NJ-1040NR and claims New York's resident credit on Form IT-112-R.

The credit is limited to your home state's tax on that income, so you pay roughly the higher of the two states' tax, not both. New York's credit applies only against state tax, so New York City residents still owe city tax on a New Jersey rental.

What to bring to the first call

• Federal and state tax returns for the last two years
• The closing statement for each property
• A list of your properties with purchase dates and how each is used
• Your current depreciation schedules, federal and New Jersey
• Current leases
• An income and expense summary for each property

Questions we hear

Is a cost segregation study worth it on my property?

It depends on the building's cost, how long you'll hold it, whether you can use the deductions and what the study costs. The faster deductions are partly recaptured as ordinary income when you sell, so we look at the hold period first.

Can my rental losses offset my salary?

Usually not once your modified AGI passes $150,000, unless you qualify as a real estate professional or materially participate in a short-term rental. Unused losses carry forward and are released when you sell the property to an unrelated buyer in a taxable sale.

I bought my building years ago. Is it too late for cost segregation?

Usually not. A method change on Form 3115 lets you claim the missed depreciation in one year without amending prior returns. If the property has been on only one return, amending that return can be an option instead.

Do I need to file in New York if my only New York income is a rental?

Generally yes. A New Jersey resident with New York rental income files a New York nonresident return, and New Jersey gives a credit for the New York tax on that income.

This page is general information about the rules in effect for 2026. It is not tax advice for your situation, and reading it does not make you a client. See our Terms of Use.