21 Apr Do I owe the exit tax when I sell my home at a loss?

Q. I bought my house in 2006 in Bergen County for $2.25 million and I’m selling it for $1.8 million. Do I still need to pay the exit tax as I have lost money on this purchase?
— Seller

A. We’re sorry to hear that you have incurred a sizable loss on the sale of your principal residence.

The “exit tax” that you refer to is not an extra tax.

It’s an estimated income tax withholding imposed by the New Jersey Division of Taxation on the closing of a nonresident taxpayer’s sale of a New Jersey residence, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.

He said the amount withheld is the greater of 10.75% of the gain realized or 2% of the selling price.

There are several exceptions to being subject to the “exit tax.”

“First and foremost is that it does not apply to resident taxpayers, so if you will be remaining a resident of the Garden State it would not be applicable,” Becourtney said. “Another common exception is if the real property sold was used exclusively as your principal residence.”

Becourtney said this withholding mechanism is in place to force nonresident taxpayers to report their sale of New Jersey real estate with the Division of Taxation — to address the concern that once a resident moves out of state they will fail to file a New Jersey nonresident income tax return and pay any resulting tax. That’s why the withholding happens at the closing.

If you do have to pay the tax, you may be eligible for a refund when you file your tax return.

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This story was originally published on April 21, 2020.

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