01 Sep I sold a vacation home. Do I owe the exit tax?

Q. I am a partner in an LLC that owned a vacation home for 15 years. The property was sold in 2020 and sale proceeds were split according to share ownership. I am now purchasing another property in the same New Jersey town. Will I still need to pay the exit tax?
— Seller

A. We’re going to assume you are a New Jersey resident for the answer to this question.

We get lots of questions about the “exit tax” when you sell a home and then move out of the state.

This “exit tax” is actually a withholding or estimated tax that is paid in advance if you are moving out of state. The cost is the greater of 8.97% of the profit on the sale of the home or 2% of the selling price, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

He said the state requires all real property owners to execute a special tax form that must be attached to all deeds upon sale of the property. Otherwise, or the deed would be rejected by the recording office, he said.

Form GIT/REP3 – Seller’s Residency Certification/Exemption” is for New Jersey resident taxpayers and contains 14 exemption choices, actually called “seller’s assurances,” that allow for any taxes on the gain to be paid when filing your NJ Resident NJ-1040 Gross Income Tax return, 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 NJ Resident Gross Income Tax Return,” he said. “Exemptions No. 2 through No. 14 apply to non-residents and will not apply to you.”

Papetti said a New Jersey resident that sells real estate in the state, and then moves out of the state, is considered a non-resident on or after the day of transfer.

Part-year residents are considered non-residents.

The forms must be completed at the time of closing and given to the buyer/buyer’s attorney, he said. The buyer’s attorney must submit the original Seller’s Residency Certification/Exemption Form GIT/REP-3 or Non-Resident Form GIT/REP-1 to the county clerk at the time of recording the deed. Failure to do so will result in the deed not being recorded, he said.

“While some may feel the 2% minimum realty transfer tax is an exit tax, it applies to any non-New Jersey resident selling real property in New Jersey regardless of if they were a New Jersey resident prior to the sale,” Papetti said. “Assuming you are a New Jersey resident and will file a New Jersey resident tax return and qualify for Exemption No. 1, there will be no 2% ‘exit tax’ at the time of closing.”

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This story was originally published on Sept. 1, 2020.

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