07 Jul I sold my home and I’m leaving the state. What’s the exit tax?

Q. I sold my primary home for $360,000 and I’m moving out of state for a job offer. What do I need to know about the exit tax? I’ve lived here since 2008.
— Seller

A. We’re sorry to hear you’re leaving the state

Lots of people are troubled when they hear the term “exit tax.”

It’s not actually a separate tax you’re charged if you leave the state.

The 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.

It’s the greater of 8.97% — New Jersey’s highest marginal income tax rate — of the profit on the sale of the home or 2% of the selling price, he said.

“The State of New Jersey requires all real property owners 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,” he said.

Let’s start with GIT/REP3, Seller’s Residency Certification/Exemption.

This is for New Jersey resident taxpayers and it contains 16 exemption choices, actually called “Seller’s Assurances,” that allow for any taxes on the gain to be paid when filing the New Jersey Resident NJ-1040 Gross Income Tax return, Papetti said.

Exemption No. 1 applies to New Jersey residents and says that all applicable taxes on the gain from the sale will be reported on a state tax return.

Exemptions Nos. 2 through 16 apply to non-residents, Papetti said.

The one you’ll want to remember is No. 2: Real property was used as a principal residence and qualifies under Section 121 of the Internal Revenue Code (IRC) which excludes up to $500,000 of gain for married taxpayers or $250,000 for single taxpayers.

A non-resident individual, estate or trust is required to complete and sign the GIT/REP-1 or GIT/REP-2 form in order to record the deed, unless the non-resident individual, estate or trust meets one of the seller’s assurances listed on the Form GIT/REP-3, he said.

When non-resident sellers calculate the estimated gross income tax payment on the sale or transfer of real property, the gain on the sale or transfer is multiplied by 8.97% — but the estimated tax payment shall not be less than 2% of the consideration for the sale or transfer stated in the deed affecting the conveyance, Papetti said.

That means that even if a non-resident seller recognizes no gain from the sale or transfer of real property in New Jersey, they are required to make an estimated gross income tax payment of the minimum 2%, Papetti said.

Any tax withheld can be refunded when filing a non-resident income tax return that reflects no gain, he said.

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

“The forms must be completed at the time of closing and given to the buyer’s attorney must submit the original Seller’s Residency Certification/Exemption Form GIT/REP-3 or Non-resident Form GIT/REP-1 to the county clerk at the time of recording the deed,” he said. “Failure to do so will result in the deed not being recorded.”

Now to address your question:

“Based on the fact you lived in your residence as your primary residence since 2008, it appears that you qualify for IRC Section 121 gain exclusion, as you used the home that was sold as your primary residence for two out of the last five years,” Papetti said. “Per Form GIT/REP3 – Seller’s Residency Certification/Exemption for New Jersey resident taxpayers, you would qualify for Exemption No. 2: Real property was used as a principal residence and qualifies under IRC Section 121 of the Internal Revenue Code which excludes up $500,000 of gain for married taxpayers, $250,000 for single taxpayers.”

Assuming you are unmarried, based on a sales price for your residence of $360,000, if the gain is $250,000 or less, you would qualify for Exemption No. 2, Papetti said. Your cost basis in the residence would need to be $110,000 or greater to result in a gain of $250,000 or less, he said.

If the capital gain exceeds $250,000, you would not qualify for one of the Seller’s Assurances and you would be subject to the withholding at your closing, he said.

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This story was originally published on July 7, 2022.

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