When we sell the house after divorce, what about the exit tax?

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Q. We divorced in 2013 and our agreement said he would live in the house as his primary residence until we decided to sell. I stayed there also in separate quarters until 2016. I paid the expenses and remained on the mortgage and the deed. Now that we are selling we are told he qualifies for an exit tax exemption but we’re not sure how to handle me because I now live out of state. The divorce agreement states my ex will maintain primary residence in the home so I would be eligible for credit for his years there. What is supposed to happen?
— Ex-wife

A. You certainly lay out a complicated case.

First, the so-called New Jersey “exit tax” is not really an extra tax, but an estimated payment of tax for those who sell their home and move out of state. New Jersey wants to make sure those people file their final non-resident tax return and pay whatever taxes are owed on the gain from a home sale.

Sellers who incur a loss on the sale of their residence but who have prepaid the exit tax prior to relocating from New Jersey will be entitled to receive a refund for the prepayment when filing their New Jersey income taxes, said Jeralyn Lawrence, a family law attorney with Lawrence Law in Watchung.

Based on the facts you presented, Lawrence said you may count any time when your ex-spouse owned the residence as time when you owned the residence as well.

But — and this is a big but — you must also meet the residency requirement on your own when it comes to qualifying for the capital gains exclusion.

“In this case, the residency requirement is met assuming you also used the residence for at least 24 months in the preceding five years,” she said. “Notably, this 24-month period need not be consecutive, but instead, may include a culmination of multiple blocks of time within the five-year period.”

Simply put, eligibility requires a total of 24 months or 730 days during the preceding five-year period, she said.

Given the complexities here, Lawrence said you should talk to a tax advisor who can make sure you are accurately reporting this transaction on your tax return while simultaneously confirming that all available exclusions are considered.

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This story was originally published on August 21, 2020.

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