The New Jersey “Exit Tax” – It’s Not What You Think
New Jersey’s so-called “Exit Tax” is not a new, special, or additional tax, and many New Jersey residents who sell their homes in order to relocate out of state are not subject to the withholding requirements at all.
A Withholding Tax for Non-Residents
In essence, the purpose of the assessment is to ensure that non-residents (and those who fail to meet specified residency requirements after a house sale) make an estimated New Jersey Gross Income Tax payment on the gain when they sell their New Jersey real estate. In other words, the State of New Jersey has established a “withholding” requirement to ensure collection of taxes owed by individuals who will not be residents of the State after the closing of title.
Calculation of Amount Witheld
The law mandates the collection of the greater of:
- 2 percent of the portion of the sale price allocated to the non-resident Seller;
- or – 8.97% of the non-resident seller’s capital gain (ie, the difference between the seller’s tax basis and the sale price).
Enforcement Mechanism: Forms, Forms, and Forms:
In order to ensure compliance, the State of New Jersey will not allow the County Clerk to record a Deed without the attachment of various forms which have been designed to determine if the withholding requirements apply. These are called “GIT-Rep” forms (Gross Income Tax Representations), and they are periodically updated based upon changes in law or Treasury Department interpretation.
If the withholding tax requirement applies based upon the forms filed with the Deed, the payment must be made when the Deed is sent to the County Clerk for recording. CHECK THE BOX The easiest way to determine if the Exit Tax withholding requirement will apply in your case would be to see whether you can truthfully check off any of the following 10 boxes on New Jersey’s current Seller’s Residency Certification/Exemption (GIT-Rep 3) form:
- I am a resident taxpayer (individual, estate, or trust) of the State of New Jersey pursuant to N.J.S.A. 54A:1-1 et seq. and will file aresident gross income tax return and pay any applicable taxes on any gain or income from the disposition of this property.
- The real property being sold or transferred is used exclusively as my principal residence within the meaning of section 121 of the federal Internal Revenue Code of 1986, 26 U.S.C. s. 121.
- I am a mortgagor conveying the mortgaged property to a mortgagee in foreclosure or in a transfer in lieu of foreclosure with no additional consideration.
- Seller, transferor or transferee is an agency or authority of the United States of America, an agency or authority of the State of NewJersey, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National MortgageAssociation, or a private mortgage insurance company.
- Seller is not an individual, estate or trust and as such not required to make an estimated payment pursuant to N.J.S.A.54A:1-1 et seq.
- The total consideration for the property is $1,000 or less and as such, the seller is not required to make an estimated payment pursuant to N.J.S.A. 54A:5-1-1 et seq.
- 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. (CIRCLE THE APPLICABLE SECTION). If such section does not ultimately apply to this transaction, the seller acknowledges the obligation to file a New Jersey income tax return for the year of the sale (see instructions). _No non-like kind property received.
- Transfer by an executor or administrator of a decedent to a devisee or heir to effect distribution of the decedent’s estate in accordance with the provisions of the decedent’s will or the intestate laws of this state.
- The property being sold is subject to a short sale instituted by the mortgagee, whereby the seller has agreed not to receive any proceeds from the sale and the mortgagee will receive all proceeds paying off an agreed amount of the mortgage.
- The deed being recorded is a deed dated prior to the effective date of P.L. 2004, c. 55 (August 1, 2004), and was previously unrecorded.
The Coast is Not Entirely Clear
Unfortunately being able to check one of the boxes on the GIT REP 3 form does not mean that no tax will be assessed as a result of your house sale. Following are other taxes that may apply:
- NJ Realty Transfer Tax (applies to the vast majority of house sales. There are partial exemptions for qualifying senior citizens, disabled persons etc)
- State and Federal Capital Gains Tax(currently $250,000 is excluded for the sale of a single person’s primary residence and $500,000 is excluded for the sale of a married couple’s primary residence)
- NJ “Mansion” Tax (a 1% tax paid by the Buyer when the sale price exceeds $1 million. Note: Buyer’s payment of the Mansion tax does not reduce seller’s payment for the realty Transfer Tax)