31 Mar Can I get out of paying the “exit tax?”
Q. I hear that there is a so-called “exit tax” for people who sell their house in New Jersey and then leave the state. I am also told that there may be a way to get around this by delaying your move. Can you tell me if that is true an what the particulars are if so?
A. Delaying your move from New Jersey won’t necessarily help you avoid the exit tax.
When you sell a house in New Jersey, you are required to pay income taxes on the taxable gain, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown. This is so regardless of whether it’s your principal residence, second home or investment property. It also applies to residents, non-residents or in your case, soon-to-be former residents.
The reason for the exit tax is that people who moved out of New Jersey or those who never resided here would take their home sale gain and never pay the taxes owed, Kiely said. So, the exit tax is the way the state makes sure it gets its taxes.
On June 29, 2004, New Jersey enacted P.L. 2004, Chapter 55, which requires sellers of real estate who are not residents of New Jersey to make an estimated income tax payment on the gain from the sale.
The law prohibits a county recording officer from recording any deed for the sale of real property unless accompanied by an appropriate form, Kiely said.
“So in order for the buyer to have their new deed recorded, they must file one of four forms completed by the seller,” Kiely said. “The most common form that the non-resident seller must complete is form GIT/REP – 1. This form is then given to the buyer’s attorney or title agent along with the appropriate estimated tax payment.”
When the GIT/REP- 1 form and payment are filed with the county recording officer, the recording officer will then record the buyer’s new deed.
Then there’s Form GIT/REP – 3, Seller’s Residency Certification/Exemption – which has eight exemptions, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.
He said exemption No. 1 applies to New Jersey residents, and states that all applicable taxes on the gain from the sale will be reported on a New Jersey Resident Gross Income Tax Return.
Papetti said exemptions 2 through 8 apply to non-residents and can be summarized as follows:
2: Real property was used a principal residence and qualifies under IRC Section 121 of the Internal Revenue Code which excludes up $500,000 of gain for married taxpayers, $250,000 for single taxpayers. Remember this does not include vacation or investment homes.
3: Addresses a mortgagor conveying the property to a mortgagee in foreclosure.
4: Seller is a governmental agency.
5: Seller is not an individual, estate or trust, i.e. corporation, partnership etc…
6: Total consideration is $1,000 or less
7: Gain from the sale will not be recognized if qualified under Sections 721 (contribution to a partnership), 1031 (like-kind exchanges), 1033 (involuntary conversions) and non non-like kind property received
8: Transfer is by an executor/administrator of an estate pursuant to decedents Will
A non-resident individual, estate or trust is required to complete and sign the GIT/REP-1 or GIT/REP-2 form in order to record the deed, unless the non-resident individual, estate or trust meets one of the seller’s assurances listed on the GIT/REP-3 form, Papetti said.
If you don’t make one of the exemptions, the income tax due applies to the taxable gain on the home sale. Here’s how it works:
Your sale price less the costs of sale equals “net proceeds.”
The costs of the sale include sales commissions, legal fees, realty transfer fees and more, Kiely said.
Next, you subtract the “adjusted basis” of the property sold.
“Adjusted basis is tax speak for your home’s original cost, plus improvements made over the years,” he said. “Net proceeds minus tax basis equals the gain on the sale.”
If the house sold was your principal residence for 24 out of the last 60 months, you get one more adjustment to arrive at taxable gain.
“If you are single, you get to subtract $250,000 from the home’s gain — $500,000 if you are married filing jointly — to arrive at your taxable gain,” he said. “In many cases, the principal residence adjustment completely offsets the gain on the sale of your home.”
This $250,000/$500,000 adjustment does not apply to second homes, vacation homes or investment property,” Kiely said. You can learn more about that here.
If you have a taxable gain, you must include it on your New Jersey resident, New Jersey part-year resident or New Jersey non-resident income tax return, Kiely said.
“New Jersey does not have the concept of a preferential capital gains tax rate. In New Jersey a capital gain is taxed the same as interest, dividends or wages,” he said.
When you file your New Jersey Part-Year Resident or Non-Resident tax return, the tax would be calculated on your actual New Jersey income. The tax rates start at 1.4 percent and rise to 8.97percent, Kiely said.
The estimated tax due is equal to the gain reportable for federal income tax purposes, if any, multiplied by the highest New Jersey tax rate for that year, Kiely said. The estimated tax payment shall not be less than 2 percent of the consideration for the sale as stated in the deed.
“As a non-resident, you make an estimated tax payment of 8.97 percent of the gain or 2 percent of the sales price whichever was higher,” Kiely said. “Accordingly, you would be due a refund, especially if you paid in the 2 percent of the sales price and actually lost money on the sale.”
And if a non-resident sells the property for a loss, they must still make an estimated tax payment of 2 percent of the sale amount, Kiely said.
And remember this: A New Jersey resident who moves out of the state is considered a non-resident on or after the day of transfer, Papetti said. Part-year residents are considered non-residents.
You can learn more about the exit tax here, and more about other home sale taxes here.
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This story was first posted in March 2015.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.