What forms are required to file New Jersey exit tax returns?

A GIT/REP-1, -2, or -3 form is required to file New Jersey exit tax returns and must be completed by the person tasked with signing the deed for the sale or transfer of real property. Filing Form NJ-1040 (resident) and/or Form NJ-1040NR (nonresident) is required for income tax returns, depending on residency status during the year. Visit New Jersey’s Division of Taxation website for more information.

Are trusts exempt from the New Jersey exit tax?

While trusts are generally not exempt, they may be subject to different rules and can potentially qualify for an exemption depending on how they were established (e.g., business trusts) and whether they meet specific criteria.

An Overview of the New Jersey “Exit Tax”

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If you’re planning to sell your home and move out of state, there are many important factors to consider: finalizing a location, determining the ideal size for your next place, finding affordable moving services etc. While decisions like these are crucial, one often-overlooked aspect that can negatively impact your cash flow if you currently live in New Jersey is the state’s “exit tax.” This article discusses just that.

What is the New Jersey exit tax, and how does it work?

The New Jersey exit tax (i.e., a withholding tax) is essentially a prepayment of the estimated capital gains tax owed on your home sale, the latter paid in advance—either before or at closing—and held in escrow. The final amount is then settled when you file your state income tax return.

The name "exit tax" is indeed a bit misleading, causing many people to mistakenly believe this is an additional or special tax imposed when selling property; New Jersey residents can misunderstand their obligations when selling a home because of this.

Why and when the NJ exit tax was established

Home sellers in New Jersey are required to pay taxes on any profits, regardless of whether the property is a principal residence, second home, or investment property. Prior to 2004, many individuals evaded this tax—particularly those who moved out of state prior to tax collection as well as rental property owners who’d never personally lived in New Jersey and failed to pay their tax liabilities upon selling. The exit tax was established in 2004 as a response to this issue to ensure all sellers fulfill their tax obligations.

How to calculate capital gains tax on your home sale

The formula used to determine your capital gain amount is simply the net proceeds minus the adjusted basis of your home.

How to calculate net proceeds from a home sale

Net proceeds is simply the amount of money you walk away with post-sale. Assuming a sale price of $600,000 and sales costs of $40,000, for example, net proceeds in this case is $560,000 (sales costs can include commissions, legal fees, realty transfer fees, and other fees associated with selling property).

How to determine the adjusted basis of a home

Your home’s “adjusted basis” is the sum of your original purchase price plus the cost of any qualifying capital improvements you’ve made (e.g., an addition to your home or perhaps a kitchen or basement renovation) plus closing costs and settlement fees, minus any depreciation in your home’s value. If you paid $350,000 for your home and another $7,000 in closing costs and then spent $50,000 upgrading your kitchen and bathrooms, for example, your adjusted basis is $407,000.

How to calculate your capital gain

In the aforementioned example, your capital gain would be $153,000 (net proceeds of $560,000 minus the home’s adjusted basis of $407,000).

How much you’d owe in NJ capital gains taxes

New Jersey taxes capital gains rates as ordinary income, with rates ranging from 1.4% to 10.75% based on your total income and tax filing status. If your NJ income tax rate is 6.37% and you have a capital gain of $153,000 from the sale of your home, for example, your total tax liability would be $9,746.10.

How much is the New Jersey exit tax?

The New Jersey exit tax requires you to withhold either 8.97% of the profit made on your home sale or 2% of the total sale price, whichever is higher. Based on a capital gain of $153,000, your estimated NJ exit tax owed would be $13,724 (since 8.97% of the capital gain is higher than the 2% of the sale price ($12,000)). As the NJ exit tax is an estimated prepayment, the amount can ultimately differ from your capital gains tax since it’s not the actual amount owed.

How the NJ exit tax is paid

Unless you qualify for an exemption (which we’ll discuss shortly), the State of New Jersey withholds the estimated tax payment at closing. Here are some specifics in this regard…

Monies are withheld at closing

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 in escrow; the law prevents any county officer from recording a deed unless it’s accompanied by the GIT/REP form (filed with the State at closing to report the transaction and initiate the withholding process) and estimated tax payment.

Monies are reconciled when you file your tax return

The amount withheld at closing is credited against your year-end income tax liability for New Jersey, possibly resulting in a refund or additional payment depending on your total income and capital gains for that year.

What happens if you don’t make a profit on your home sale?

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 and will receive a full refund of the withheld amount upon filing your New Jersey tax return.

Determining your residency status

Before diving into NJ exit tax exemptions, it’s important to understand the definition of residency in New Jersey since exemptions and closing requirements differ based on this status. 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, including part-year residents who continue to live in NJ for a portion of the year.

How to minimize or avoid NJ exit tax liabilities

Several available exemptions can help reduce (or even eliminate) required estimated tax payments at closing. These include…

Remaining a NJ resident

Should you continue to reside in New Jersey after selling a home, you’re required to submit the aforementioned GIT/REP-3 form at closing (exempting you from paying estimated taxes on the sale) with any taxes on capital gains instead reported on your New Jersey Gross Income Tax return.

Using the primary residence exclusion

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 (single filers) or $500,000 (married and filing jointly) from their tax returns.

Considering a 1031 exchange

A 1031 exchange (i.e., a like-kind exchange) is a tax-deferral strategy allowing individuals to sell a property and reinvest the funds into a similar one to avoid immediate capital gains taxes.

Qualifying for seller’s assurances

Some non-resident sellers who meet certain criteria may not have to pay state tax. These “seller’s assurances” are detailed on the GIT/REP-3 form and include the following conditions:

· The 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 part of a short sale initiated by the mortgagee whereby the seller has agreed not to receive any proceeds from the sale, with the mortgagee receiving all proceeds to pay off an agreed-upon mortgage amount.

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 proceeds from the sale to finance other plans such as making a down payment on a new place or saving for retirement.

Have questions about the NJ exit tax? Schedule a free consultation with one of our CFP® professionals to get them answered.

FAQs

A GIT/REP-1, -2, or -3 form is required to file New Jersey exit tax returns and must be completed by the person tasked with signing the deed for the sale or transfer of real property. Filing Form NJ-1040 (resident) and/or Form NJ-1040NR (nonresident) is required for income tax returns, depending on residency status during the year. Visit New Jersey’s Division of Taxation website for more information.
While trusts are generally not exempt, they may be subject to different rules and can potentially qualify for an exemption depending on how they were established (e.g., business trusts) and whether they meet specific criteria.

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The content in this post was developed by our team of writers and reviewed by our team of CFP® professionals here at Vision Retirement.

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