What You Should Know About the New Jersey “Exit Tax”
Don’t be fooled by the name
The “exit tax” isn’t an extra tax.
It’s a prepayment of the capital gains tax you’d owe anyway on your home sale — collected at closing and held in escrow until you file your NJ return. If you overpaid, you get a refund. If you owe more, you’ll settle up. New Jersey introduced the rule in 2004 to make sure sellers leaving the state didn’t skip the tax bill.
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.
Key Takeaways
- The New Jersey "exit tax" isn't a tax in the traditional sense but a withholding that prepays estimated capital gains tax on a home sale, held in escrow at closing.
- The withholding is either 10.75% of the profit or 2% of the total sale price (whichever is greater); even sales at a loss require the 2% payment.
- The amount withheld is credited against your year-end New Jersey income tax return, so you'll get a refund (or owe more) once actual liability is calculated.
- New Jersey established this withholding in 2004 to make sure people leaving the state actually pay tax owed on real estate profits.
- You can reduce or eliminate the withholding by remaining a NJ resident, using the primary-residence exclusion ($250,000 single/$500,000 married), or performing a 1031 exchange.
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?
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
4 Ways to Reduce or Eliminate the NJ Exit Tax
Each path is detailed on the GIT/REP form filed at closing.
Option 1
Stay a NJ resident
If you’re keeping NJ residency after the sale, file Form GIT/REP-3 at closing. No estimated tax is withheld — you’ll report any gain on your NJ income tax return as usual.
Option 2
Primary residence exclusion
Lived in the home at least 2 of the last 5 years? Exclude up to $250,000 of gain (single) or $500,000 (married filing jointly) from your return.
Option 3
1031 exchange
Roll the proceeds into a like-kind property and defer the capital gains tax entirely. Strict timelines and rules apply — works best for investment properties.
Option 4
Seller’s assurances
Niche carve-outs on the GIT/REP-3: sale price $1,000 or less, deed dated before August 1, 2004, or a short sale where the lender takes all proceeds.
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.
Reviewed for accuracy
Paul Muller, AEP®, CFP®
Founder and Relationship Manager at Vision Retirement, with 30+ years in the financial industry.
Read full bio →FAQs
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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.
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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.
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.
