Q. My spouse and I have been New Jersey residents since 1998. I am being relocated to Florida. We are under contract to purchase a property, and also to sell our New Jersey home. The purchase of the new home will be made before we sell the old one. Our New Jersey home has made modest capital gains, maybe $200,000. Considering the exit tax, will I experience a penalty as a non-resident selling my New Jersey home that I would not experience as a state resident?
— Moving on
A. We get it. Will moving to Florida and establishing residency there before you sell the Jersey property hurt at tax time?
Not exactly, and that’s because the so-called exit tax is really misunderstood.
It’s not an extra, additional or special tax.
It is just a prepayment of the potential tax due on the sale of real property by non-residents, said Amy Jennings, a certified public accountant with Wilkin & Guttenplan in East Brunswick.
“If the actual tax due from the sale ends up being less than the prepayment, you would receive a refund,” she said.
That said, there are a few exceptions to the estimated tax payment requirement, Jennings said. One of these exceptions is for a property that was used as a principal residence as defined by Internal Revenue Code Section 121.
“Under IRC Section 121, if during the past five years ending on the date of the sale or exchange of the property, the property has been owned and used by the taxpayer as his or her principal residence for at least two years, a gain exclusion may be available,” she said. “For married couples filing jointly, as long as both spouses meet these requirements and there have not been any other such property sales in the past two years for which a gain was excluded, the maximum limitation of the excluded gain is $500,000.”
Jennings said the $200,000 gain on the sale of your New Jersey home may be covered by this exemption and allow you to avoid making the estimated tax payment.
The exemption can be claimed using Form GIT/REP-3.
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