The New Jersey exit tax how it works Vision Retirement financial planning independent RIA CFP fiduciary investment advice investment management New Jersey New York Bergen county financial advisor Ridgewood NJ

If you're planning to sell your home and move out of state, there are many important factors to consider including finalizing a location, determining the ideal size for your next home, and finding affordable moving services. While these decisions are crucial, one often-overlooked aspect that can negatively affect your cash flow if you currently live in New Jersey is the state’s "exit tax."

What is the New Jersey exit tax?

Those who sell a home in New Jersey are required to pay taxes on any sales profits regardless of whether it’s a principal residence, second home, or investment property.

Many people in fact evaded this prior to 2004, most notably residents who moved out of the state before tax was collected and homeowners who never actually lived in New Jersey (e.g., rental property owners) and failed to pay their tax bills upon selling. The New Jersey exit tax was thus established in 2004 to address this very issue.

The New Jersey exit tax is, in fact, a misnomer as many people assume it’s an additional tax or special tax imposed when you sell your property. The truth is, however, that it’s merely a prepayment of the estimated tax you’ll owe on the sale, paid in advance (either before or at closing) and held in escrow. The tax is then settled when you file your state income tax return.

How the New Jersey exit tax is calculated

The New Jersey exit tax requires you to withhold either 8.97% of the profit you make on the sale of your home or 2% of the total sale price: whichever is higher.

To calculate the profit, you first need to know your home’s “adjusted basis”—what you paid for the home plus the cost of any capital improvements (not repairs) you’ve made. For example, if you paid $350,000 for your home and spent another $50,000 upgrading your kitchen and bathrooms, your adjusted basis is $400,000.

Next, calculate the net proceeds (the sale price minus the cost of the sale) from your home sale. Assuming the sale price was $500,000 and the cost was $50,000, for example, your net proceeds would be $450,000. Note that sales costs can include commissions, legal fees, realty transfer fees, and other fees associated with the sale of the property.

In the aforementioned example with a home sale profit of $50,000 (net proceeds of $450,000 minus the home’s adjusted basis of $400,000), the estimated tax owed would be $10,000—as 2% of the sale price is higher than 8.97% of the capital gain.

NJ exit tax particulars

At closing, the settlement agency or buyer’s attorney is required to file a GIT/REP form with the State of New Jersey and hold the amount of $10,000 in escrow: with the law preventing any county officer from recording a deed unless it’s accompanied by the GIT/REP form and estimated tax payment.

When you file your New Jersey tax return later on, the actual capital gain tax you owe is deducted from your estimated tax payment—with any remaining monies refunded to you.

Should you sell the home at a loss or in the absence of a profit, you’re still required to make an estimated tax payment of 2% of the sale amount while not owing any tax and will receive the entire 2% back when you file your New Jersey tax return under these conditions.

Determining your residency status

Before we discuss NJ exit tax exemptions, it’s important to understand how residency is defined in New Jersey as exemptions and closing requirements differ based on residency status.

While residents are defined as those who sell a home in New Jersey and maintain residency within the state, nonresidents are those who sell a home in New Jersey and establish residency out of state. Part-year residents (meeting the definition of either a resident or nonresident for only part of the year) are also considered nonresidents.

Exemptions to avoid the New Jersey exit tax

It’s not so uncommon for regulations to include exemptions, and the New Jersey exit tax is no different. Those who continue to reside in New Jersey after selling a home are required to submit a GIT/REP-3 form at closing, exempting them from paying estimated taxes on the sale; instead, any taxes on capital gains are reported on their New Jersey Gross Income Tax return.

Furthermore, New Jersey residents who’ve lived in their primary residence for at least two out of the last five years can exclude up to $250,000 of profit from their tax returns (for single filers)—rising to $500,000 for those who are married and filing jointly.

Nonresidents, meanwhile, should keep in mind several exemptions that (if applicable) will exempt them from making an estimated tax payment. Referred to as “Seller’s Assurances,” these are detailed on the GIT/REP-3 form and include the following criteria:

· The property sold was used as a principal residence and qualifies under IRC Section 121 of the Internal Revenue Code, allowing for the exclusion of up to $500,000 in gains for married taxpayers or $250,000 for single taxpayers. To qualify for this gain exclusion, the home must have been one’s primary residence for at least two of the last five years.

· The total consideration for the property is $1,000 or less.

· The deed is dated prior to August 1, 2004 and has not been previously recorded.

· The property sold is part of a short sale initiated by the mortgagee whereby the seller has agreed not to receive any proceeds from the sale, and the mortgagee will receive all proceeds to pay off an agreed amount of the mortgage.

In sum: the New Jersey exit tax

While the term “exit tax” is a bit misleading, you'll need to keep it in mind if you're planning to sell your home and leave the Garden State. This is especially true for those relying on the proceeds from a home sale to finance other plans such as making a down payment on a new house or investing in retirement.

Have questions about the New Jersey exit tax? Schedule a FREE discovery call with one of our CFP® professionals to get them answered!

What You Should Know About the New Jersey “Exit Tax”