If you are considering relocating in retirement, there are a few important things to keep in mind. This can include whether you want to downsize, how close you want to be to your friends and family, and the pros and cons of retiring in New Jersey. One financial factor to think about is the so-called NJ Exit Tax. While not an official separate tax, this is something people leaving the state will need to pay after selling their home.

What Is The NJ Exit Tax?

The New Jersey “Exit Tax” is a term commonly used to describe a requirement for non-residents who sell property in New Jersey. It refers to a withholding that is applied to the proceeds from the sale of real estate when the seller is not a resident of New Jersey. The state mandates this withholding to ensure that sellers pay their capital gains taxes on any profits from the sale, even if they are no longer residents.

Resident vs Non-Resident Explained

• For these purposes, a New Jersey resident is someone who maintains New Jersey as their permanent home and files state taxes as a resident. Residents are exempt from the NJ Exit Tax when selling property.
• A non-resident is someone who has moved out of New Jersey and no longer considers it their permanent home. Non-residents are subject to the NJ Exit Tax.

What Is Included In NJ Exit Tax?

In essence, the “exit tax” is a rule to ensure that non-residents fulfill their New Jersey tax obligations when selling real estate in the state. Here’s a breakdown of how it works:

1. Withholding Requirement: When a non-resident sells a property in New Jersey, they are required to withhold a portion of the sale price or a calculated amount based on the estimated capital gain, whichever is higher. This amount is typically 8.97% of the gain or 2% of the sales price.
2. Purpose: The goal of the withholding is to make sure non-resident sellers pay their New Jersey income tax on any gains realized from the property sale. It’s not an additional tax, but rather a prepayment of potential capital gains taxes owed to the state.
3. Refund Eligibility: If the withholding exceeds the actual tax liability, the seller can file a New Jersey state tax return to claim a refund for the overpayment. On the other hand, if the amount withheld is less than the taxes owed, the seller will need to pay the difference.
4. Applies to Non-Residents: The exit tax only applies to those who are not New Jersey residents at the time of the sale.

How To Avoid Paying NJ Exit Tax

As with other types of taxes, there are exemptions to the New Jersey Exit Tax for certain situations. There are instances where sellers may not be subject to this withholding or can reduce the amount withheld. Here are some of the key exemptions:

• New Jersey Residents: If the seller is a New Jersey resident at the time of the sale, they are exempt from withholding by filing the GIT/REP-3 form.
• Principal Residence: If the property qualifies as the seller’s main home, and they meet the federal capital gains exclusion, they can avoid withholding.
• Zero Gain: No withholding is required if there’s no gain on the sale, using the GIT/REP-3 form.
• Transfers Without Consideration: Transfers between spouses or through inheritance with no money involved may be exempt.
• 1031 Exchange: Properties sold through a like-kind exchange for a similar property may be exempt.
• Corporate Transfers: Transfers of real estate by corporations, partnerships, estates, or trusts are subject to different rules and may be exempt.

For sellers who believe they qualify for an exemption, the GIT/REP forms are typically used to certify their exemption from the withholding tax. It’s always a good idea to consult with a tax professional or real estate attorney to ensure proper documentation and filing when selling property in New Jersey.

Have questions about the NJ Exit Tax and whether it applies to you? Contact Zynergy Retirement Planning today.