By Cole Sodaro

If you’ve recently been talking about moving around a former New Jersey resident, it’s likely you’ve heard something about the “exit tax” you’ll be required to pay as you move out of the state. As your conversation continues, you’ll likely hear stories of the price residents have paid to move, and how this forced them to reconsider moving. But what is this cost, and what do these stories all mean?

In actuality, the New Jersey “Exit Tax”, as it’s referred to, has been likened more to urban legend than fact by CPAs. The law requires sellers of New Jersey homes to pay the state tax in advance of moving, of either 8.97% of the profit on the sale of their home or 2% of the total selling price – whichever is higher.

The objective of the pre-payment is that no New Jersey residents can move out of the state without first paying taxes on the income from the sale of their home. At the end of the day, the New Jersey “Exit Tax” is simply misunderstood as an additional or special tax, instead of the pre-payment of potential income tax due that it really is.

The resulting question for many New Jersey taxpayers is, what happens if they don’t incur a profit on the sale of their home? The good news is that homeowners that incur a loss on the sale of their residence, and those who also pre-paid the tax before leaving the state, will be refunded the pre-payment when filing their NJ State Income Taxes.

Here’s some other information that may be pertinent to taxpayers who are concerned by the New Jersey “Exit Tax” estimated payment:

  • Homeowners may be exempt under Internal Revenue Code Section 121, which makes gains on the sale of a home exempt from capital gains if the homeowner has used the home as their primary residence for 24 of the last 60 months (for married couples filing jointly, only one spouse must meet this requirement)
    • The exemption for these gains is up to $250,000 for single homeowners, $500,000 for those homeowners who are married filing jointly
      • Taxpayers are automatically disqualified if the home was acquired through a like-kind exchange or if they’re subject to expatriate tax
      • Taxpayers may qualify for a partial exclusion of gain if the reason for the sale of the home was a change in workplace location, a health issue, or an unforeseeable event
  • The pre-payment for the selling of the residence should be recorded on the GIT/REP form

As time goes on, tax professionals hope that the New Jersey “Exit Tax” misnomer goes the way of other urban legends and becomes a footnote in taxpayers’ memories.

Please contact us with any questions on how the New Jersey “Exit Tax” may impact your specific situation.