Will mom owe the exit tax if she moves to Florida?

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Q. My mother is putting her house on the market and moving out of state, possibly to Florida. They originally bought the property in the mid 1970s, built a house and in 1993, it became her primary residence. It was demolished from Sandy and a new house was built. Will my mother have to worry about paying an exit tax? She is 74 and has been retired and on a fixed income for over a decade.
— Trying to help

A. There are a few things to consider here.

First, for both federal and New Jersey tax purposes when you sell a home, age is not relevant.

Additionally, the fact that the home was destroyed in 2013 from Sandy and subsequently rebuilt also does not matter.

When New Jersey residents sell their homes and prepare to move out of state, you must prepay a standard tax rate on the profit from the sale, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

“You need to pay this tax when you move, rather than at the time you would normally file your state income tax return,” DeFelice said. “New Jersey withholds either 8.97% of the profit or 2% of the selling price, whichever is higher.”

This is what’s called the exit tax, but it’s really just an estimated tax that the state collects upfront.

“This estimated tax is adjusted when the seller files a New Jersey tax return for the year of the sale,” he said. “The seller must pay this tax prior to leaving the state, even if there is no gain from the sale. But the state takes all that into account once the year-end income tax return is filed.”

The state requires the prepayment so that no New Jersey resident can move out of the state and fail to file state tax return, essentially leaving the state without paying the tax that would be due.

“Although the prepayment obligation is an inconvenience for a seller moving out of New Jersey, the tax is refunded or reduced as appropriate at the time of filing if there was no gain after exemptions are taken,” DeFelice said.

Once you sell a home in New Jersey and are leaving the state, you are technically considered a non-resident, he said. For non-residents who have New Jersey income taxes withheld at their closing, rather than wait to file their tax return, they can file a Form A-3128 to claim an early refund after closing along with proof of overpayment.

As far as actual capital gains, people who live in their primary residence for two of the last five years get a large tax break.

“Single filers are exempt from federal capital gains taxes on the first $250,000 of gains and married couples filing jointly are exempt on the first $500,000 of gains,” he said. “This exemption is only allowable only once every two years, and as the seller you must not have sold another home and claimed the exemption within the last two years.”

The state of New Jersey follows the federal home sale capital gain exclusion rules, he said.

While this should give you an idea of the costs involved, DeFelice recommends meeting with a a real estate attorney and a competent CPA who can properly advise your mother on the specific tax forms that need to be filed and whether she will qualify for any further exemptions upon the sale.

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This story was originally published on April 7, 2022

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.