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

If you’re looking to sell your home and move out of state, there are so many considerations to keep in mind. Finalizing a location, assessing the ideal size of your next home, and finding affordable moving services will surely rank high on your list. While all these decisions are important, one oft-overlooked consideration can adversely impact your cash flow if you currently live in New Jersey: the NJ “exit tax.”

The New Jersey exit tax, explained

When you sell a home in New Jersey, you’re required to pay taxes on any sales profits. This is true whether your home is a principal residence, second home, or investment property.

Prior to 2004, many people evaded this tax. For example, residents who moved out of New Jersey and homeowners who never actually resided in the state (e.g., rental property owners) would simply never settle their tax bill upon selling their homes. Consequently, the New Jersey exit tax was enacted in 2004.

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, however, is that the exit tax is merely a prepayment of the estimated tax you owe on the sale of your property. This estimated tax is 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 to determine your residency status

Residents are defined as those who sell a home in New Jersey and maintain residency within the state. Nonresidents are defined as those who sell a home in New Jersey and establish residency out of state. Part-year residents (those meeting the definition of either a resident or nonresident for only part of the year) are also considered nonresidents. These distinctions are important to know as exemptions and closing requirements can differ based on your residency status.

New Jersey exit tax particulars

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

To calculate the capital gain, you first need to know your home’s “adjusted basis”: defined as 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, you’ll calculate the net proceeds (the sale price minus the cost of the sale) from your home sale. For example, assuming the sale price was $500,000 and the cost was $50,000, your net proceeds would be $450,000. Note that your sales costs can include commissions, legal fees, realty transfer fees, and other fees associated with the sale of the property.

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

At closing, the settlement agency (or buyer’s attorney) must file a GIT/REP form to the State of New Jersey and hold the money—in this case, $10,000—in escrow. It’s important to know this law prohibits any county officer from recording any deed unless accompanied by this form and estimated tax payment.

Later, when you file your New Jersey tax return, the actual capital gain tax you owe will be deducted from your estimated tax payment—with any remaining monies refunded to you.

Even if you sell the home at a loss or in the absence of a capital gain, you’re still required to make an estimated tax payment of 2 percent of the sale amount. Under these conditions, you won’t owe any tax and will receive the entire 2 percent back when you file your New Jersey tax return.

New Jersey exit tax exemptions

It’s not so uncommon for regulations to include exemptions. The New Jersey exit tax is no different.

If you remain a New Jersey resident, you’ll need to file a GIT/REP-3 form (due at closing), which will exempt you from paying estimated taxes on the sale of your home. Instead, any applicable taxes on sales gains are reported on your New Jersey Gross Income Tax Return.

Furthermore, New Jersey residents who have occupied their primary residence for at least two of the last five years can exclude up to $250,000 of the gain (for single tax filers) and up to $500,000 of the gain (for those filing jointly).

Nonresidents should also take note of several exemptions which, if you qualify, means you aren’t required to make an estimated tax payment. These exemptions, called “Seller’s Assurances,” are listed 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: excluding up to $500,000 in gains for married taxpayers or $250,000 for single taxpayers. In order to qualify for this gain exclusion, the home must have been your primary residence for at least two of the last five years.

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

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

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

In sum: the New Jersey exit tax

While the New Jersey “exit tax” is a misnomer, you must still take this into consideration if you plan on selling your NJ home and leaving the Garden State. This is especially true if you are dependent on your sale proceeds to fund other initiatives, such as a down payment on a new home or for your retirement.

Still have questions about the New Jersey exit tax? Schedule a FREE Discovery call with one of our CFP® professionals.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.