The “New Jersey Exit Tax” is a term you might hear if you’re selling property in the Garden State and moving elsewhere. It’s a common misconception that causes a lot of confusion, particularly for long-time NJ residents.
In reality, there isn’t actually a specific “Exit Tax” in New Jersey. What people are referring to is a prepayment of estimated state income tax on any capital gains you make from selling your property.
This article provides a comprehensive overview of what’s commonly called the “state of NJ exit tax,” explaining how it works, how it’s calculated, and what exemptions might be available to you.
Understanding the NJ Exit Tax: What It Is and Why It Exists
If you’re selling property in New Jersey and moving out of state, you may have heard of the “exit tax.” Let’s break down what it is and why it exists.
Origins and Purpose
The exit tax was initiated by former Governor Jim McGreevy. The state says that the purpose of the tax is to ensure that New Jersey collects capital gains taxes from sellers who are relocating out of state.
Defining the “Exit Tax”
First, it’s important to know that it’s not an additional tax. What people call the “exit tax” is actually a prepayment of estimated state income tax on any potential capital gains you might see from the sale.
The tax is calculated and paid when you leave the state, but it’s all reconciled at the end of the tax year when you file your state income tax return.
Calculating the New Jersey Exit Tax: A Step-by-Step Guide
So, how do you figure out what you owe? The “exit tax” isn’t really a separate tax; it’s just the state’s regular capital gains tax applied to the sale of a property. The tax you pay is the higher of these two calculations: 8.97% of your profit or 2% of the selling price.
It’s important to get this right, but because there are exemptions and ways to reduce your tax burden, it’s best to work with a tax professional who can give you personalized advice.
Here’s how the basic calculation works:
- Profit: Net proceeds minus adjusted basis.
- Adjusted Basis: Purchase price plus any capital improvements you made to the property.
- Net Proceeds: Sale price minus the costs of selling the property (realtor fees, for example).
Let’s say you bought a house for $350,000 and put $50,000 into improvements. That makes your adjusted basis $400,000. Now, you sell the house for $500,000. Your profit is $100,000. Two percent of the sale price ($500,000) is $10,000. 8.97% of your profit ($100,000) is $8,970. In this case, the tax you’d pay is $10,000 because that’s the higher amount.
Exemptions and residency status: Minimizing your tax liability
The amount of New Jersey’s gross income tax you’ll pay when you sell your property depends on whether you’re considered a resident, a nonresident, or a part-year resident. Your residency status affects which exemptions you’re eligible to claim.
When you sell property in New Jersey, you’ll have to fill out Form GIT/REP-3, the Seller’s Residency Certification/Exemption form. This form helps the state determine your residency status and whether you qualify for any exemptions.
Here are a few of the most common exemptions:
- Primary residence exemption. If you’re a New Jersey resident who’s lived in the home you’re selling for at least two of the last five years, you can exclude up to $250,000 of the profit if you’re filing as single, or $500,000 if you’re filing jointly.
- IRC Section 121. Nonresidents may be able to claim an exemption under IRS Section 121.
- Low-value sales. If the total amount you’re getting for the property is under $1,000, you may be exempt from paying the gross income tax.
Reporting and Compliance: How to Navigate the Process
When you sell property in New Jersey, you’ll need to file Form GIT/REP. It’s important to complete and submit this form accurately when you close the sale.
The “exit tax” you pay acts as a credit towards your final New Jersey state income tax bill for the year.
If you sold at a loss, or your capital gains were less than expected, you might get a refund or a reduction in the amount you owe.
Frequently Asked Questions
Is there an exit tax to leave NJ?
No, there isn’t a specific “exit tax” for simply moving out of New Jersey. However, as a former resident, you’ll still be subject to New Jersey income tax on any income earned within the state or from New Jersey sources after you’ve moved. This includes things like rental income from property you still own in NJ.
What is NJ state leave tax?
I think you may be thinking of the New Jersey Family Leave Insurance (FLI) program, which is funded through payroll deductions. It provides paid time off to care for a new child or a seriously ill family member. It’s not really an “exit tax,” but rather a mandatory contribution while you’re employed in the state.
What is the exit tax charge?
Again, New Jersey doesn’t have a formal “exit tax.” You’ll only owe taxes on income earned in NJ while you were a resident, or from NJ sources even after you’ve moved. This could include capital gains taxes if you sell a property in NJ after establishing residency elsewhere.
How to avoid exit tax?
Since there’s no actual exit tax, there’s nothing to “avoid.” Just be sure to file a final New Jersey income tax return for the year you move, reporting all income earned while you were a resident. And, continue to file as a non-resident if you have any income sourced to New Jersey after you move, like rental property income.
Wrapping Up
Let’s recap: The New Jersey “Exit Tax” isn’t a special tax you pay for leaving the state. It’s a prepayment of estimated income tax on capital gains, and it’s reconciled when you file your taxes.
Your individual circumstances matter a lot when it comes to the Exit Tax. Your residency status and whether you qualify for an exemption can significantly affect your tax liability.
Because the tax code can be complex, it’s always a good idea to talk with a qualified tax professional. They can assess your specific situation and help you comply with the law while minimizing your tax obligations.