Federal income taxes are the same for every state. The only difference is how much money you make and what tax bracket you fall in.
State taxes are a completely different story because each state has its own rules. New Jersey is a perfect example with their “Exit Tax”. In this article, we’ll talk about ways to avoid NJ exit tax.
What’s the deal?
When you sell your NJ home and then move out of state, you have to pay the NJ exit tax.
When you sell a home, regardless of the state you live in, you have to pay tax on any gains you made. How much tax you pay depends on how long you owned and lived in the home.
According to NJMoneyHelp.com, “On June 29, 2004, New Jersey enacted P.L. 2004, Chapter 55, which requires sellers of real estate who are not residents of New Jersey to make an estimated income tax payment on the gain from the sale.”
It has nothing to do with selling and moving out of state. It’s just about selling the home and paying taxes on any gains made at the time of closing. The rule was enacted to ensure that NJ would receive the taxes owed on the property regardless if the seller was an NJ resident or not.
If you do not fill out one of the forms (see below) and pay the estimated taxes owed, the deed may be rejected.
Exemptions
There are 1 of 4 forms that you need to file when selling a home in NJ. Form GIT/Rep 3 Seller’s Residency Certification/Exemption – has 8 exemptions. The first applies to NJ residents. The remaining exemptions are listed below:
- Real property was used as a principal residence and qualifies under IRC Section 121 of the Internal Revenue Code which excludes up to $500,000 of gain for married taxpayers, $250,000 for single taxpayers. Remember this does not include vacation or investment homes.
- Addresses a mortgagor conveying the property to a mortgagee in foreclosure.
- Seller is a governmental agency.
- Seller is not an individual, estate, or trust, i.e. corporation, partnership, etc…
- Total consideration is $1,000 or less
- Gain from the sale will not be recognized if qualified under Sections 721 (contribution to a partnership), 1031 (like-kind exchanges), 1033 (involuntary conversions) and non-non-like kind property received
- Transfer is by an executor/administrator of an estate pursuant to decedent’s Will
If one of these exemptions doesn’t apply to you, then you’ll have to pay tax on the proceeds and fill out Form GIT/Rep 1 or 2.
Conclusion
There are several ways to avoid NJ exit tax, but if you don’t qualify for one of those ways, make sure you fill out one of those forms and pay the taxes due.
Related Reading:
Should You Report Income From the Sale of Your Home on Your Income Taxes?
Why Financial Literacy is Important
My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com
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