27 May I’m active duty military. Do I have to pay the exit tax?

Q. I am active duty military. I purchased a home in New Jersey on June 30, 2020, 20 days after I arrived in New Jersey on military orders. I have now received military orders for a permanent change of station (PCS) to Germany with a report date of June 29. We are selling our home and the house is under contract for a June 15th closing. Because of the closing date, I miss qualifying for the standard 24-month primary residence occupancy exit tax exemption. Is there an exemption that covers me based on the Soldiers and Sailors Act or other state/federal law since I am required to depart New Jersey prior to the full 24 months based on military PCS orders?
— Soldier

A. Thank you for your service.

There is an exception.

First, if you sell your principal residence and you lived in it for at least 24 months out of the preceding 60 months, then the first $250,000 of gain on the sale of your half of the home is tax free. If you’re married, you can exclude $500,000.

This is called the IRS Section 121 exemption, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

He said there is an exception to the 60-month rule if you or your spouse are a member of the Uniformed Services or the Foreign Service, an employee of the intelligence community of the United States, or an employee, enrolled volunteer or volunteer leader of the Peace Corps.

You may choose to suspend the five-year test period for ownership and residence when you are on qualified official extended duty, Kiely said.

“This means you may be able to meet the two-year residence test even if you didn’t actually live in your home for at least the two years during the five-year period ending on the date of sale,” he said. “What this means is for active duty service members is you can live in the home for a while, go on active duty and then come home and live in the house again. Then go back on active duty, and so on. For you, the five-year period is extended to 10 years.”

But this doesn’t apply to you because you left the house to go to Germany before the two-year period ended and then sold the house, Kiely said. Because you sold the house, you can’t move back into it.

In terms of the exit tax, this isn’t an extra tax but an estimated tax payment on the sale of your house.

“The law states if you are leaving the state you must pay in the greater of 2% of the gross sales price of the house or the taxable gain on the sale times the highest New Jersey tax bracket,” he said. “The exception to this rule is if the house qualifies under IRS section 121 exemption. Unfortunately, this exception doesn’t apply to you, so at closing, the appropriate tax will be withheld and submitted to the State of New Jersey.”

If you can move the sale date of the home to June 30, that would change things and you will meet the two-year requirement, Kiely said.

“If not, you will be required to file a NJ-NR income tax return for 2022. You will report your New Jersey income including the gain or loss from the sale of your home,” Kiely said. “You will also report the amount of tax that was withheld from the sale of your home. You will receive a refund or pay an amount due on the return.”

Email your questions to .

This story was originally published on May 27, 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.