Will we have to pay the exit tax if we don’t have a big gain?

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Q. We are married filing jointly and wanted to clarify: If we do not achieve a gain of $500,000 on the sale of our home, this would make us exempt from the exit tax? The home we are selling has been our primary residence for the past 25 years and with that, we will be achieving a gain. It was purchased for $91,000 and is listing for $325,000.
— Selling soon

A. Many in New Jersey believe that the state imposes an “exit tax” when residents sell their home and move out of state.

This is not really how it works.

The so-called exit tax is actually a withholding or estimated tax that is paid in advance if you are moving out of state, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

Non-resident sellers calculate the estimated gross income tax payment on the sale or transfer of real property in New Jersey, and the gain on the sale/transfer is multiplied by the highest rate of tax for the taxable year, which right now is 10.75%, Papetti said. But the estimated tax payment shall not be less than 2% of sale price, he said.

Papetti said the state requires all real property owners who sell their New Jersey real estate to execute a special tax form that must be attached to all deeds upon sale of the property, or the deed would be rejected by the recording office.

The form is called GIT/REP3 – Seller’s Residency Certification/Exemption, and it contains sixteen (16) “Seller’s Assurances” that exempt the seller from the tax withholding requirement.

Seller Assurance No. 2 applies to real property that was used as a principal residence and qualifies under Section 121 of the Internal Revenue Code (IRC), which excludes up $500,000 of gain for married taxpayers and up to $250,000 for single taxpayers.

“Based on the facts you provided, assuming you qualify for Section 121 gain exclusion which requires that the residence that was sold was used as your primary residence for two out of the past five years, the $234,000 gain ($325,000-$91,000) from the sale would qualify for Seller Assurance No. 2 and not be subject to any New Jersey tax withholding,” Papetti said.

Note that if a New Jersey resident moves out of the state, they are considered a non-resident on or after the day of transfer. Part-year residents are considered non-residents.

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This story was originally published in July 2024.

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