23 Sep What is the New Jersey ‘exit tax’ used for? To fund schools?

Q. What is the New Jersey ‘exit tax’ used for? To fund schools?
— Taxed enough

A. The so-called “exit tax” is not actually a separate tax, but it’s an estimated tax payment to cover the income tax resulting from the gain on the sale of real estate in New Jersey.

When you sell a house in New Jersey, you are required to pay income taxes on the taxable gain, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

“This is so regardless of whether it’s your principal residence, second home or investment property,” he said. “It also applies to residents, non-residents or soon-to-be former residents.”

Here’s how you calculate the taxable gain.

First, the sales price minus the cost of the sale equals “net proceeds,” Kiely said.

Costs of sale include sales commissions, legal fees, realty transfer fees and more.

Next, you subtract the “adjusted basis” of the property sold.

“Adjusted basis is tax speak for your home’s original cost plus improvements made over the years,” he said.

Net proceeds minus tax basis equals the gain on the sale.

“If the house sold was your principal residence for 24 out of the last 60 months, you get one more adjustment to arrive at taxable gain,” he said. “If you are single you get to subtract $250,000 from the home’s gain — $500,000 if you are married filing jointly — to arrive at your taxable gain.”

This $250,000/$500,000 adjustment does not apply to second homes, vacation homes or investment properties, he said.

In many cases, the principal residence adjustment completely offsets the gain on the sale of your home.

If you have a taxable gain, you must include it on your New Jersey resident, New Jersey part-year resident or New Jersey non-resident income tax return.

“New Jersey does not have the concept of a preferential capital gains tax rate. In New Jersey, a capital gain is taxed the same as interest, dividends or wages,” Kiely said.

The problem New Jersey had was people who moved out of New Jersey or those who never resided here would take their home sale gain and never pay the state its due, Kiely said.

So on June 29, 2004 New Jersey enacted P.L. 2004, Chapter 55. This law requires sellers of real estate who are not residents of New Jersey to make an estimated income tax payment on the gain from the sale, he said.

“The law prohibits a county recording officer from recording any deed for the sale of real property unless accompanied by an appropriate form,” Kiely said. “So, in order for the buyer to have their new deed recorded, they must file one of four forms completed by the seller.”

If the tax isn’t ultimately due, you can get a refund.

The most common form that the non-resident seller must complete is form GIT/REP – 1. This form is then given to the buyer’s attorney or title agent along with the appropriate estimated tax payment, he said. When the GIT/REP- 1 form and payment are filed with the county recording officer, the recording officer will then record the buyer’s new deed, he said.

The estimated tax due is equal to the gain reportable for federal income tax purposes, if any, multiplied by the highest New Jersey tax rate for that year, he said.

“The estimated tax payment shall not be less than 2% of the consideration for the sale as stated in the deed,” Kiely said. “So, if the non-resident sells the property for a loss, they must still make an estimated tax payment of 2% of the sale amount.”

If you sell your New Jersey home and buy a new home in New Jersey, you would file form GIT/REP — 3, he said.

“You would check the first box indicating that you are a New Jersey resident and will file a resident gross income tax return and pay any applicable taxes on any gain from the sale,” he said. “You would not have to make an estimated tax payment.”

If the house you sold was used exclusively as your principal residence within the meaning of IRS Code section 121, you would check Box #2 on form GIT/REP – 3, he said.

Kiely said this section of the code covers the forgiveness of gain on the sale of your principal residence.

“Under this section, the first $250,000 of gain on the sale of your principal residence is forgiven; $500,000 for a married couple,” he said. “So, if you sell your home and move to Florida, you wouldn’t have to make an estimated tax payment if the home was your principal residence and you made less than $250,000/$500,000.”

So what does New Jersey do with the money?

The tax isn’t specifically meant to fund schools, as you asked.

“Income taxes fund all the state’s normal activities,” Kiely said.

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This story was originally published on Sept. 23, 2020.

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