What is the NJ Exit Tax?
Retiring in New Jersey has its challenges. High property taxes, high sales tax, high income tax, and high inheritance taxes are just a few obstacles that must be considered when developing a retirement plan. While there are financial planning strategies that may help, many have decided to leave the state in the hopes of lessening these burdens.
For those who decide to leave the state I ALWAYS hear the following question. “I have heard New Jersey gets you on the way out as well, something called an Exit Tax? Can you explain this to me?” This question is very common so let me explain.
First, this is an incorrect statement. The “Exit Tax” is not an additional tax or even a new tax. In fact, there really is no “Exit Tax”. So, what is it then? It is a pre-payment of the possible taxes owed on the sale of your property. When you sell a house in New Jersey, regardless if you are leaving the state or not, you're required to pay income taxes on the taxable gain whether it's your principal residence, secondary home or an investment property. However, many people were leaving the state without paying this tax. To stop this New Jersey passed legislation (which went into force on June 29, 2004) that states a deed can't be recorded unless the estimated tax is paid. The state guaranteed it would get its money by now enforcing that the county recording officer must include a form (GIT/REP) along with an estimated tax payment to record any deed for the sale of property. Paying the estimated taxes at the actual closing only applies to non-resident sellers which you will be if leaving the state for good. Hence, therefore it is often referred to as the “Exit Tax”.
How do you pay taxes on the gains of real estate? The taxes owed are calculated on the actual gains (not the entire sale price). Take the sale price then subtract closing fees incurred, what you paid for the home, improvements, etc. and then you have your actual gains. In addition, if the house sold was your primary residence and you lived there for 2 out of the last 5 years, you can subtract $250,000 from the home's actual gains, or you can subtract $500,000 if married filing jointly. Because of this many people do not owe taxes on their primary home.
For those people who do not owe taxes on their primary homes, this is where the “Exit Tax” gets you. The 2004 change in law states that the estimated tax payment shall not be less than 2 percent of the consideration for the sale as stated on the deed. So, if your primary residence has no gains (or even a loss) you still must pay an estimated tax of 2 percent on the sale amount. You will get this 2 percent back when you file your NJ Income Tax returns but until then, you will be without those funds. That is where New Jersey “gets you” one more time especially if that money was needed to complete your next move.
As always, please feel free to call the office or email firstname.lastname@example.org if you have any further questions.
P.S. This does not include the New Jersey “Mansion Tax”. Yep, this one is real. If you are selling a home for over 1 million dollars, please call me to discuss.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.