If you are considering relocating in retirement, there are a few important things to think about. These include whether you want to downsize, how far you’ll be from friends and family, and the pros and cons of retiring in New Jersey. One key financial detail to consider is the so-called New Jersey Exit Tax. While it’s not a separate, official tax, it is a real cost for people who sell a home in New Jersey and move out of state.

What Is The NJ Exit Tax?

The “Exit Tax” is a nickname for a rule in New Jersey that applies when someone who no longer lives in New Jersey sells property located in the state.

Here’s how it works: If you’re not a resident of New Jersey at the time you sell, the state requires that a portion of your sale proceeds be withheld to cover any state income taxes you may owe on the profit. This withholding acts as a prepayment of your capital gains tax.

Resident vs Non-Resident Explained

• New Jersey Resident: You are considered a resident if New Jersey is your permanent home and you file taxes as a New Jersey resident. Residents are not subject to the Exit Tax when selling property.
• Non-Resident: If you’ve moved out of New Jersey and no longer claim it as your permanent home, you are considered a non-resident. Non-residents are subject to the Exit Tax when selling real estate in the state.

What Is Included In NJ Exit Tax?

The Exit Tax rule ensures that anyone who sells property in New Jersey, but lives elsewhere, still pays any income tax owed to the state.

Here’s how it works:

• Withholding Requirement:
  Non-residents must withhold either:
  • 8.97% of the estimated capital gain, or
  • 2% of the total sales price
    …whichever is greater.
• Why This Exists:
  This isn’t an extra tax. It’s a way for New Jersey to make sure sellers who live out of state still pay the proper state income tax on any profit they make from selling their property.
• Refund Possibility:
  If too much money is withheld, you can file a New Jersey tax return and apply for a refund. If too little is withheld, you’ll need to pay the difference.
• Only for Non-Residents:
  The Exit Tax does not apply to residents. It’s only for those who’ve moved out of New Jersey by the time of the sale.

How To Avoid Paying NJ Exit Tax

Some sellers may qualify for exemptions or ways to reduce the withholding. Here are common situations where the Exit Tax might not apply:

• You’re a NJ Resident:
  If you still live in New Jersey, you can file Form GIT/REP-3 to avoid the withholding.
• It’s Your Main Home:
  If the property is your primary residence and you qualify for the federal capital gains exclusion, you can avoid the Exit Tax.
• No Profit on the Sale:
  If you didn’t make a profit on the home, you can file the GIT/REP-3 form to show zero gain and avoid the withholding.
• Gifts and Inheritances:
  Property transfers with no money exchanged—like between spouses or through inheritance—may be exempt.
• 1031 Exchange:
  If you’re using a like-kind exchange to swap one investment property for another, the Exit Tax may not apply.
• Corporate or Trust Transfers:
  Property sold by a business, estate, trust, or partnership may follow different rules and could be exempt.

If you think you qualify for an exemption, you’ll typically need to fill out and submit the appropriate GIT/REP form. To make sure everything is handled correctly, it’s smart to speak with a tax advisor or real estate attorney who understands New Jersey law.

Impact of NJ Exit Tax on Estate Planning

If you’re thinking about leaving property to your heirs, it’s important to understand how the NJ Exit Tax may come into play. When a property is inherited and later sold by your heirs, the withholding rules can still apply, especially if the heirs are not New Jersey residents.

For example:

• If your estate passes real estate to beneficiaries who live out of state, they may be subject to the Exit Tax withholding when they sell the property.
• However, if the property is inherited, the cost basis is typically “stepped up” to the market value at the time of death. This can reduce or eliminate the capital gain, potentially lowering or eliminating the withholding.

Proper estate planning, including setting up trusts or consulting with a tax advisor, can help minimize confusion and avoid unnecessary tax surprises for your beneficiaries.

Have questions about the NJ Exit Tax and whether it applies to you?

Contact Zynergy Retirement Planning today. We’re here to help guide you through the financial side of relocating in retirement.