15 Jul How can I get a refund of the exit tax?

Q. My primary residence for 18 years was in New Jersey until 2018. I sold the home in 2019 and had to pay an exit tax of $11,000 at closing. I was told I could get it back with a non-resident tax filing in 2019. How must this be reflected on the return?
— Seller

A. The exit tax is not a separate tax that needs to be paid before someone can leave the state.

Under New Jersey income tax laws, as with almost all states with income tax laws, when a non-resident sells real estate in New Jersey, the income earned from that real estate sale is subject to income tax in New Jersey.

This income tax is what you paid at the time of the sale of the residence, said David Ritter, chair of the tax practice at Brach Eichler in Roseland.

“New Jersey law, like a lot of other states, requires that the income tax be paid at the real estate closing because otherwise many individual non-residents would never report the sale to New Jersey and would not pay the appropriate income tax amount,” he said.

The amount withheld, the $11,000 in your question, is based upon the sale price and is generally an overstatement of the amount of tax due, he said.

You must file a nonresident income tax return — Form NJ 1040 NR (Non-Resident) — and report the sale of the house under the normal income tax rules for non-residents, Ritter said.

“If the sale qualifies for the federal exemption for a primary residence for the exclusion of the gain on the sale, then it qualifies for an exemption under New Jersey income tax law,” he said. “The federal exemption is $500,000 for a joint return and $250,000 for a single return.”

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This story was originally published on July 15, 2020.

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