01 Oct If I sell my N.J. home, will I owe tax on the profit?

Q. I am about to sell my home in New Jersey and I’m moving to another state, where I will rent. I expect a profit of $400,000 on the sale of my primary residence. Will I have to pay 8.97% on that profit? That would be over $38,000.
— Seller, soon

A. Congratulations on the impending sale of your home.

What you’re asking about is the so-called exit tax, which is an estimated tax payment required for some home sales.

You didn’t say if you were single or married.

Federal law allows an exclusion of gain on the sale of your principal residence of $250,000 if you are single and $500,000 if you are married, said Laurie Wolfe, a certified financial planner and certified public accountant with Peapack Private Wealth Management in New Providence.

She said New Jersey law follows this federal rule with respect to principal residences.

To qualify for the exclusion, you must meet a few tests.

The eligibility tests for exclusion of gain on your home are as follows:

1. You must not have acquired the home through a like-kind exchange.

2. You must not be subject to the expatriate tax.

3. You must have owned the home for at least 24 months in the five years leading up to the sale date.

4. You must have lived in your home for at least 24 months in the five years leading up to the sale date.

5. You must not have excluded a gain on a different home within the prior two years from the sale date.

If you meet all these tests and you are married, the $400,000 is not taxable for federal or state purposes, Wolfe said. If you are single, $150,000 ($400,000-250,000) will be taxed to you by New Jersey at your marginal tax rate, she said.

Your marginal rate is the tax bracket you are in for New Jersey tax purposes.

“As a single person if your taxable income is between $75,000 and $500,000, your marginal rate is 6.37%,” she said. “After that, and up to $5million of taxable income, your rate would be at the 8.97% you mention.”

This tax is calculated when you file your return for the year of sale, she said.

The exit tax is not the tax we’ve just described.

Rather, it is a withholding tax that New Jersey requires at the closing of a real estate transfer when a New Jersey resident is leaving the state, Wolfe said.

“They want to make sure you file a tax return and calculate any tax due. In other words, they don’t want you to skip town,” she said. “When you file the return, if your actual tax is less than the withholding tax, you will receive the difference as a refund.”

There is a way to claim exemption from this withholding.

The frequently asked questions section about gross income tax on real property transfers on the Division of Taxation’s website says that if you qualify for the gain exclusion, you can be exempt from this withholding tax, Wolfe said.

“The FAQs further state that the entire gain must be excluded from gross income. In your case, you would appear to qualify for the exemption only if you are married, because if you are single only a portion of the gain is excludable,” she said. “The withholding would be the greater of 2% of the sales price of the home or 8.97% of the gain on the sale.”

One of the documents that will be completed when the sale goes through is NJ Form GIT/REP-3 – Seller’s Residency Certification/Exemption. This is where you declare your residency and claim exemption from the withholding tax, if eligible, she said.

Wolfe advises you to seek the advice of a real estate attorney or other competent professional who can help you determine your liabilities.

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This story was originally published on Oct. 1, 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.