If I trade a property for another, will I owe the exit tax?

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Q. If a non-resident of New Jersey sells a New Jersey property and does a 1031 exchange for a Florida property, how does New Jersey receive its tax? Will it withhold a 2% nonresident fee or exit tax? How can you get the money back?
— Owner

A. Let’s start with explaining a 1031 exchange.

This is a tax break that allows the owner of a property to essentially trade one property for another and defer capital gains taxes. It must be a like-kind property and cannot be a primary residence, but must be an investment property.

Let’s also go over what’s often called the exit tax.

New Jersey requires that nonresident sellers — or those becoming non-resident sellers — of real property make an estimated tax payment on the sale of their real property, said T. Matthew Wolfe, an attorney in the wills, trusts & estates and taxation practice groups at Einhorn, Barbarito, Frost & Botwinick in Denville.

“The general purpose is to keep money from leaving the state in situations where the taxpayer may not have any further connection to the state,” he said. “The tax is the greater of 8.97% of the profit on the sale or 2% of the total proceeds, whichever is higher.”

In the case of a 1031 exchange, to avoid having this tax withheld, Wolfe said the seller must fill out a GIT-REP 3 Form and claim Seller’s Assurance #7, stating the gain is exempt under IRC 1031.

When the exchange is complete, the Seller then completes a GIT-REP 1 Form, which shows the value of the like-kind property, he said.

“The qualified intermediary at the title company might still withhold the 2% until the entire transaction is complete, but assuming IRC 1031 was followed properly, you should get that money back when your taxes are filed,” he said.

Wolfe noted this, with his own addition about our state: Benjamin Franklin once said, “Nothing is certain except death and New Jersey taxes.”

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This story was originally published on Jan. 23, 2023.

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