26 Aug I inherited a home. Do I have to pay the exit tax?

Q. I inherited my home and now my primary residence. Do I need to pay an exit tax if I sell and move out of state?
— Seller soon

A. The so-called exit tax is not actually a separate tax.

It’s an estimated tax payment to cover the income tax resulting from the gain on the sale of real estate in New Jersey.

When you sell a house in New Jersey, you are required to pay income taxes on the taxable gain, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

This is so regardless of whether it’s your principal residence, second home or investment property, he said. It also applies to residents, non-residents or soon-to-be former residents. The income tax applies to the taxable gain on the home sale.

“In your case you will receive a step up in basis on the home,” Kiely said, explaining that a “step up in basis” is tax-speak for an increase in your cost basis. “When you inherit an asset, your cost basis is the value of the property on the day the decedent passed away. So, if you sold the home immediately after inheriting it, there would be no federal or state income tax.”

Now, the exit tax.

This tax was established because people would sell real estate in New Jersey and they would not file a New Jersey income tax return, nor pay the tax owed, Kiely said. So New Jersey came up with a law that states if you sell real estate in New Jersey and the federal exclusion of $500,000 (married) or $250,000 (single) does not apply, then you must pay an estimated tax payment at closing for the larger of 2% of the sales price or the taxable gain times New Jersey’s highest tax rate.

“This forces you to file a New Jersey income tax return,” he said. “Usually when you file the return you will receive a refund.”

But there’s a question you have to answer. Did you live in the home as your principal residence for 24 out of the previous 60 months?

“If yes, there will be no taxable gain because the house was your principal residence,” Kiely said. “At closing your attorney will prepare a State of New Jersey Seller’s Residency Certification/Exemption Form (Form GIT/REP – 3).”

Your attorney will check box No. 2, which states:

“The real property sold or transferred is used exclusively as a principal residence as defined in 26 U.S. Code section 12,” he said. “Since your home was your principal residence for at least 24 out of the prior 60 months there will be no taxable gain and no estimated tax payment will be required,” he said.

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This story was originally published in August 2024.

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