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When we sell our home, will we owe the exit tax?

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Q. My husband and I are selling our home here in New Jersey. We purchased the property in 2013 and have lived in the home ever since. I will be staying in New Jersey with my daughter for the school year, with my parents, after the home sells, while my husband moves to Florida and stays with his parents. We bought the home for $209,000, have a mortgage of $185,000 and will list it for $500,000. When we do our 2021 taxes, I will still be residing in New Jersey. Will we have to pay the exit tax or are we exempt? We will eventually buy in Florida.
— On the move

A. It will be an interesting year for you as you live in different states.

Before we get to the exit tax, which is not an extra tax but an estimated tax payment New Jersey requires on some home sales, let’s talk capital gains.

One of the most favorable provisions found in the Internal Revenue Code is the exclusion of gain upon sale of a principal residence – up to $250,000 for all taxpayers and up to $500,000 for joint filers, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.
New Jersey follows the federal rules.

A joint filer is entitled to exclude up to $500,000 of gain realized upon sale of a principal residence as long as the taxpayer meets an ownership test and a residence test, he said.

“The ownership requirement is that the taxpayer owned the home for at least 24 months out of the last five years leading up to the date of sale,” he said. “For a married couple filing jointly, only one spouse must meet the ownership requirement.”

The residence requirement is that the taxpayer owned the home and used it as their principal residence for at least 24 months of the previous five years. For this test, each spouse must meet the residence requirement individually for the joint filer to qualify for the full exclusion, Becourtney said.

Before closing costs and without factoring in capital improvements, you are projecting a gain of $291,000 upon selling your New Jersey residence. You and your husband have resided in this residence for more than the past seven years. If you sell it within three years of your husband’s move to Florida, you will qualify for excluding your entire gain from both federal and New Jersey income tax, Becourtney said.

Now to the so-called exit tax.

When a New Jersey nonresident sells their home, the law requires a tax prepayment of the greater of 2% of the selling price or 10.75% — the top tax rate — of the taxable gain realized, Becourtney said.

The state considers New Jersey residents who sell their New Jersey home and move outside of the state nonresidents for the purpose of the sale, he said.

“So in your situation, a payment of $10,000 of New Jersey estimated tax should be required for the closing to take place,” he said. “Your attorney will need to prepare certain tax forms required in this situation. This tax payment will be claimed on your 2021 New Jersey gross income tax return.”

Good luck with the moves.

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This story was originally published on Sept. 8, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.