I’m selling my home. Will I owe the ‘exit tax?’

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Q. I own homes in New Jersey and Pennsylvania. I moved to the Pennsylvania one few years ago and my daughter lives in the New Jersey one. Next year she plans on buying it for the price I initially paid and there will be no capital gain. How is the “exit tax “ handled?
— Confused

A. Let’s go over the rules.

New Jersey follows the federal rules as far as excluding capital gains from the sale of a principal residence.

An exclusion of $250,000 for singles, or $500,000 if married filing jointly, is allowed on the gain from the sale as long as the home was a principal residence for at least two of the five years preceding the date of sale, sale Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.

“Stated differently, when a New Jersey resident changes residency, they have three years to sell their former New Jersey principal residence in order to obtain the gain exclusion, both for federal and New Jersey purposes,” he said.

You said you moved a few years ago, so we hope your dates match what’s required for the capital gains exclusion.

Now the so-called exit tax.

This is a mandatory tax withholding on the sale of the residence, not an additional tax.

“New Jersey law requires nonresidents selling New Jersey residences to make a tax payment at closing of either 10.75% – highest tax rate – of the gain realized or 2% of the selling price, whichever is greater,” Becourtney said. “When you sell the residence next year, you won’t be generating a gain, so 2% of the selling price must be withheld and forwarded to the New Jersey Division of Taxation, otherwise your sale will not go through.”

You will then have to file a 2020 New Jersey nonresident income tax return in 2021 to request a refund of the withheld tax, assuming you have no New Jersey source income that would give rise to a New Jersey tax liability, he said.

“Think of the `exit tax’ as a prepayment of tax due to your having exited New Jersey,” he said.

There’s one more thing you should know about the pending sale.

Presumably you paid a good deal less for the residence than its true current value, and so you’re selling it to your daughter for a good deal less than you would to a stranger, Becourtney said.

“The Internal Revenue Service would construe this as a gift equal to the difference between the fair market value and the selling price to your daughter,” he said. “Assuming this amount exceeds $15,000, a federal gift tax return (Form 709) would be called for.”

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This story was originally published on Dec. 6, 2019.

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