05 Jan I’m selling my home. What happens with the exit tax?

Q. I am selling my home in Montclair for $1.626 million in January 2024 after having purchased it for $999,999 in May of 2016. After living in the home from May 26, 2016 to Aug. 29, 2022, I moved from New Jersey to Portugal and rented out the Montclair home. Based on GIT/REP rules, the title company involved with the sale is insisting on withholding 2% ($32,500) of the sale price ($1.626). My questions: If New Jersey abides by federal tax laws, shouldn’t it withhold a certain percentage of my capital gains ($1.626 million less $999,999) instead of 2% of the sale price? And I’ve heard that the seller and buyer split the 2% over a certain sale price. Is this true?
— Seller

A. Congrats on your move.

Here’s what you need to know about how the sale will be taxed.

To guard against New Jersey real estate sellers leaving town and not paying tax owed on a gain realized upon sale, the New Jersey Division of Taxation requires an estimated payment to be made at closing equal to 10.75% (highest tax rate) of the gain, but not less than 2% of the gross proceeds on the sale, said Neil Becourtney, a certified public accountant and tax director with Smolin, Lupin & Co. in Red Bank.

That’s what’s commonly called the exit tax.

Even is the property is sold at a loss, a payment will be required in many situations, Becourtney said.

Form GIT/REP-3, Seller’s Residency Certification/Exemption, lists 16 exemptions from the estimated payment requirement, he said.

No. 2 is for when the real property sold is used exclusively as a principal residence.

“While you will qualify for a gain exclusion of up to either $250,000 or as much as $500,000 if a joint filer, since you will have rented the property since September 2022, you don’t qualify for this exemption,” Becourntey said. “You will certainly be subject to tax on recapture of depreciation claimed against the rental income.”

The title company is justified in insisting on the 2% withholding, assuming the tax on your gain is not greater than that amount, he said.

It is unclear what is the basis for your statement that the seller and buyer split the 2% withholding over a certain sale price, he said.

“You will report the sale on a 2024 New Jersey nonresident income tax return, Form NJ-1040NR, on which you will claim the withholding as a payment,” Becourtney said. “Maybe you are confusing this with the New Jersey realty transfer fee, whereby the seller pays a graduated fee based on the sales price ($6.05 per $500 for a sales price over $1 million) and the buyer pays an additional 1% fee on all home sales of $1 million or more.”

So sure, you can negotiate for pretty much anything as part of your sale — though it’s probably too late for that now — but whether or not your buyer would agree? Who knows.

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This story was originally published in January 2024.

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