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The New Jersey Exit Tax - NOT

Nov. 28, 2007
Categorized in: New Jersey homes
Tagged with: homes, new jersey, real estate, taxes

Every few months someone asks me about the "New Jersey Exit Tax." Now, NJ has many, often exorbitant taxes, but for most people, there is no "exit tax." Homeowners who live in NJ and are selling their primary residence to move out of state are not obligated to pay a special fee to do so. 

There are cases where an out-of-state NJ property owner may have money escrowed at closing to cover any state taxes they might have incurred when they sell their NJ investment property. They need to talk with their tax adviser.

March 25, 2008 Update - Since I first published this report, it has become apparent that the State of New Jersey is becoming a bit aggressive on this issue, to the point that people who close on the sale of their home in NJ and no longer have a NJ address may be liable for the withholding noted above.  However, attorneys in NJ are saying that if the gain in value of the property is within the Federal limits of $250,000 for a single person or $500,000 for a married couple, they would not be obligated to withhold funds for payment.  No Federal gain, no New Jersey gain, they tell me.

But, be sure to check with your tax adviser on this point.

User Comments

1. RE: The New Jersey Exit Tax - NOT

Written by: Vici
May. 22, 2008

Since moving back to NJ one year ago I'm amazed how confused everyone is over this "Exit Tax" including me.  How much does NJ charge on captial gains in excess of the federal limits? 

Any light you can shed on this subject is helpful.

2. RE: The New Jersey Exit Tax - NOT

Written by: chia wang
Jun. 4, 2008
I feel the United States is no longer the great Democratic nation it keeps claiming it is in particular when those they hold up as examples of inferiority are getting better as we are getting worse.

My son is in the epicenter of the earthquake region of China and he is having difficulties leaving the area to go to somewhere safer even for a few days or weeks.The Chinese government is working on his visa as he waits. A key reason is because the idea of freedom of movement and open egress and access is foreign there. Even so, China has been much more open and user friendly while the U.S. has become more restrictive.

That New Jersey would be the first to restrict people's right to move at will just seems to fit its profile and the jokes New York always make about this State. What a terrible state we have put ourselves in (intended).

3. RE: The New Jersey Exit Tax - NOT

Written by: Karl von Loewe
Jun. 4, 2008
Chia Wang, thank you for your comment.  However, please note that New Jersey does NOT restrict movement out of the state.  That has become an urban myth, and that is why I originally posted.  People who leave the state and try to avoid taxes they are liable for may not avoid those taxes. 

4. RE: The New Jersey Exit Tax - NOT

Written by: Anonymous
Jul. 21, 2008
How does the executor of a decedents estate deal with the GIT/REP?

5. RE: The New Jersey Exit Tax - NOT

Written by: Karl von Loewe
Jul. 22, 2008
The best course of action in such a case is to consult an attorney familiar with New Jersey law.

6. RE: The New Jersey Exit Tax - NOT

Written by: charles p sullender
Dec. 27, 2008

 

I recently moved to southern califorina within 1 year i have recieved a 3500.00 bill for a exit tax from NJ.Why?What is this?Is it leagal? I have never heard of something so assnine and stupid in my life.What happens if i don't pay it?And can i take them to court for taxation without proper representation?I will not pay it at any cost?

7. RE: The New Jersey Exit Tax - NOT

Written by: Karl von Loewe
Dec. 29, 2008

Charles, I'm sorry for the hassle that NJ seems to be putting you through.  The state may believe that you didn't file a NJ tax form for the year you left, or may have some other reason to think you have some tax liability.

The best advice I can give you at this time is to contact the closing agent for your property.  If an attorney closed the transaction, so much the better.  Contact him or her and ask for a reading on the state's request.  It may be directly related to the closing, such as payment of the real estate transfer fee which was not made.  Check your closing statement in the section "Government Recording and Transfer Charges" to see if there is any entry for "Realty Transfer Fee."  If not, that could be the issue.

In any case, I recommend getting in touch with the agent who closed your sale in NJ.

Good luck.

8. RE: The New Jersey Exit Tax - NOT

Written by: Bruno
Jan. 4, 2009

Hello, Karl, very informative blog. I am interested in your opinion about my situation:

I purchased a home in NJ in Jul-2007 (< 2 years) and recently changed jobs (from North Jersey to NE Philly, so didn't meet Federal "relocation distance test," > 50 miles). I am currently in the process of selling the NJ home and buying one in PA. Cash for both closings is very tight, and I didn't budget enough for 2% non-resident sales tax.

By providing my attorney with a relative's address in NJ (not my new permanent residence), I may be able to postpone paying this 2% tax until early 2010 (when I file NJ tax return). Is this a good idea? Or completely illegal?

9. RE: The New Jersey Exit Tax - NOT

Written by: Karl von Loewe
Jan. 4, 2009

Bruno, I really can't recommend committing fraud in order to avoid a NJ tax, although I'm convinced many try.  However, unless I am mistaken, there have been cases when the IRS waived at least in part the two-year requirement, which could lessen your liability, especially in this economic climate.  Check with your tax advisor, or even your attorney, to determine what options, short of fraud, might be available.

Good luck,

Karl 

10. RE: The New Jersey Exit Tax - NOT

Written by: Jenny
Jan. 17, 2009

I am really confused. I wondered if you can give me some insight into my particular situation. In June of 2007 my husband and i relocated to NC. We were  unable to sell the house and after almost  year in August 2008  we have decided to rent it. ( we are renting it at loss) We will be attempting to sell again in 2009 and will be trying to aggresively get rid of the house short of giving it away. I know about the nj transfer tax but i am not aware of anything else that i may be responsible for. If i understand correctly i will have to pay 2% to NJ for just selling the house on top of the trasnfer fee? Can you please let me know what i am missing here? 

11. RE: The New Jersey Exit Tax - NOT

Written by: Karl von Loewe
Jan. 19, 2009

Jenny, since 2004 New Jersey has required non-resident individuals who sell or transfer real property in NJ make an estimated gross income tax payment on the gain.  I am not an attorney nor an accountant, but the information I have gleaned from attorneys is that if you are exempt from the federal capital gain, then you are most likely exempt from the NJ withholding.

The federal rule is that you must have lived in the property as your primary residence for two of the last five years.  If so, then you may have gain of up to $250,000 as an individual or $500,000 as a married couple, without incurring any federal tax liability. So, if you lived in your NJ home for at least two years before you moved in 2007, you should be safe as far as any gain up to $500,000, and consequently, probably safe from NJ withholding.  Your own situation should be reviewed by a NJ attorney.

I repeat that I am not an attorney, and this is not legal advice, but I hope this helped a little.

Karl

12. RE: The New Jersey Exit Tax - NOT

Written by: Karl von Loewe
Jan. 19, 2009

Jenny, let me add another comment, having just found my copy of the State of New Jersey Seller's Residency Certification/Exemption (C.55, P.L. 2004) form.  Instructions for this form refer to the section Seller Assurances: "If you meet one of the eight criteria listed you are not required to make a tax payment at this time."

On the form itself, box number 7 states: "The gain from the sale will not be recognized for Federal income tax purposes under I.R.C. Section 721, 1031, 1033 or is a cemetery plot."

Again, I am not an attorney and this is not legal advice, but it seems to me that you may not have a tax liability to NJ if you do not have one to the Feds.

Karl

13. RE: The New Jersey Exit Tax - NOT

Written by: charles sullender
Feb. 21, 2009

Karl,  i  found out about this whole exit tax thing thru some research.NJ says that the reason they charge a exit tax is as follows: If you we're to move out of jersey  and now reside in another state,they lose money meaning,lets say you pay ex:3500.00 a year in state taxes,when you move they(NJ) lose that much money from you and takes at least a year for a another individual moving to NJ to make up the difference for you that the state lost because of you moving,so in other words that so called 3500.00 you pay in taxes the state loses for a year until somebody can make up the difference.That is why they send you the bill so they(NJ) doesn't lose any money waiting a year.                                                         thank you charles

14. RE: The New Jersey Exit Tax - NOT

Written by: Jennifer
Mar. 15, 2009

Thank you Karl for all the info!

My mother in law and her husband moved from NJ in November 08' and had lived in the house for 3 of the last five years and just bought a house here in GA. They cleared $425,000.00 and used a portion to buy the house down here. She still ownes another property in NJ but is renting it out. Would she still be responsible for the exit tax? Do you have to pay on each property? They are disabled and still struggling where ever they live why tax them?

Jennifer

Atlanta, GA

 

15. RE: The New Jersey Exit Tax - NOT

Written by: Karl von Loewe
Mar. 16, 2009

Jennifer, as I understand it, your in-laws would be responsible for the "exit tax" if they had a federal capital gain when they sell the investment property.  I do not know what percentage of their gain would be involved, but it would be withheld at closing.  If there is no capital gain, then it seems that they would not be liable.  If they used an attorney to close the sale of their property last year in New Jersey, they might want to get in touch with him/her and find out for certain how much tax they might be liable for.  Since I am neither an attorney nor an accountant, I really couldn't give them advice, but certainly their attorney could.

Karl

 

16. RE: Curious

Written by: jayne ollin
Mar. 29, 2009

Hi all, Hi Karl and thanks for this information. I am also unclear about the tax from these explanations it sounds like there is one if you sell a house in NJ and do not reinvest. Is that so?

We owned and still own a house in Vermont which we had hoped to sell in 07. We bought a house in NJ to be closer to family, hoping to sell the house in Vt by now. After two years in NJ we feel we can't afford to live here, so have this house on the market. If we sell it while still having the vt house would we be considered leaving the state? We did file here in nj as our primary residence for 07 and 08. But we are officially switching our primary back to vermont this spring.

As for gains, we have now at least two years in the nj property, and have invested at least 100k in upgrades, repairs etc.

We won't clear more than 250k.

17. RE: The New Jersey Exit Tax - NOT

Written by: Karl von Loewe
Mar. 30, 2009

Jayne, it would appear that you may not owe anything to New Jersey because your increase in equity probably won't trigger IRS tax.  Remember the basic real estate rules for avoiding a tax by IRS:

     You've lived in the house as your primary residence for at least two of the last five years, and

    Your gain in the period of ownership does not exceed $250,000 as a single person or $500,000 as a married couple.

Those are the basics; there are additional provisions, however.  It's best to talk with an attorney or an accountant once you have sold one of the properties.  Only then can you be relatively certain of your situtation.  I am neither an accountant nor an attorney, so my advice must be taken with a shaker of salt.

 

18. RE: The New Jersey Exit Tax - NOT

Written by: OutaFkingNJ
Apr. 2, 2009

Karl,

The exexmption you refer to as not taxable under IRC §§ 721 (contribution of property to a partnership in exchange for an interest in the partnership), 1031 (like-kind exchange, basically trading one property for another similar property ) and 1033 (involuntary conversion) would not be applicable to the federal home gain exemption.

The attorney's are relying on the fact that NJ uses federal taxable income as the starting point for determining a taxpayer's New Jersey liability.  Thus, if the federal government does not require you to put it on your 1040, NJ cannot tax it as it does not have a specific statute requiring you to add back into your NJ tax base. 

Consider checking all the exemption boxes off and then staple or Acco clip an empty wallet to the back of the form.  :-)

 

 

19. RE: The New Jersey Exit Tax - NOT

Written by: Henry Weissenhiemer
Apr. 2, 2009

"Cemetary Plot" - I guess that one works because if I can't sell the house and get out of the state, I will die there and you may as well bury me next to my old dog and gold fish in the back yard as the property tax will deplete any money I could possible have for a decent funeral.  :-)

20. RE: The New Jersey Exit Tax - NOT

Written by: Robert
Apr. 10, 2009

Karl, I'm still a bit confused over this 2% tax and hoping that you can help clarify it for me. I have been a lifelong resident of New Jersey and now plan to retire, sell my home in NJ and move out of state. I purchasded my current home over five years ago and will be closing on the sale of it in the coming months. Soon after the closing I will be relocating and purchasing a new home out of state. Given this scenario would I be liable to pay NJ 2% of the sale price of my NJ home?

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New Jersey Real Estate

Hillsborough, New Jersey

Real estate market information and occasionally spirited opinions about residential real estate in Somerset, Hunterdon, Mercer and Middlesex Counties by a REALTOR® with over a quarter century of experience. COMMENTS ARE WELCOME. Please use the Add Comment link at the bottom of the posting.

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