New Jersey “Exit Tax” – The Truth Behind this Misnomer

The term “exit tax” has generated much confusion among New Jersey residents selling their homes to move out of the state.  While many believe that this is a tax imposed when you sell property in New Jersey and change your domicile, this is an inaccurate statement. It is not an additional tax, but merely a pre-payment of potential income tax due from the sale of the home.

P.L. 2004, Chapter 55 became effective August 1, 2004 and was enacted to ensure that the state would collect income tax from nonresident sellers on the resulting gains from sales of property. This tax payment is collected at closing and is a required condition to recording the deed.

• Form GIT/REP-3 is used by resident taxpayers -- and by nonresident taxpayers claiming one of the recognized exemptions -- to claim an exemption from withholding at the time of sale. The form contains 14 exemption choices, called “Seller’s Assurances.” The first exemption is for resident taxpayers who will be paying the tax on their Resident NJ 1040 Gross Income Tax return.  Exemptions 2 through 14 can be used by residents or nonresidents.
• Form GIT/REP-1 or GIT/REP-2 is used by nonresident taxpayers with no qualifying exemptions.

The estimated Gross Income Tax due is calculated by multiplying the gain on sale or transfer by the highest rate of tax (8.97%) or 2% of the sales price, whichever is higher. The pre-payment is recorded on the taxpayer’s NJ Nonresident Return and treated as a prepayment of tax.  If there is an overpayment of tax (due to, e.g., there not being a taxable gain on the sale of the residence) the “exit tax” transforms to the “exit refund” whereby the overpayment will be refunded.

The seller is considered a nonresident unless a new residence has been established in New Jersey. Part-year residents are considered nonresidents.

Observation: Bear in mind that for federal income tax purposes, homeowners may be able to exclude gain on the disposition of a home from income under IRC Sec. 121, which states that the taxpayer must own and occupy the property as a principal residence for two of the five years immediately before the sale. However, the ownership and occupancy need not be concurrent. The law permits a maximum gain exclusion of $250,000 ($500,000 for certain married taxpayers). Generally, this exclusion can only be claimed once every two years. A reduced exclusion is available to anyone who does not meet these requirements because of a change in place of employment, health or certain unforeseen circumstances. Unlike under former law, the gain on the sale of a house is now permanently excluded, rather than deferred, and a taxpayer doesn’t have to purchase a replacement home to exclude the gain. New Jersey follows federal tax law and if there is any amount taxable for federal purposes, it will also be taxable for New Jersey purposes.

The New Jersey “Exit Tax” is a misnomer, but still needs to be taken into consideration if you plan on selling your home and leaving the state. Additionally, New Jersey imposes a Realty Transfer Fee and both New Jersey and New York enforce the mansion tax, which I’ll address in an upcoming blog. An understanding of what is required at closing and knowing the financial impact will avoid surprises at tax time.