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New Jersey “Exit Tax”

Hardly any other aspect of real estate is as misunderstood as the so-called “Exit Tax.”Whatever you have heard, it is probably wrong. The fact is, it is not even a tax.

Our esteemed, former governor, Jim McGreevy came up with this scheme. The concern was that people were making a lot of money when they sold their properties and moved out-of-state, which should be no surprise because they were tired of being taxed to death by the State of New JerseyBut, they weren’t filing their NJ tax returns the following April, and not reporting their capital gain, and not paying the capital gain tax.So, the plan was to add another tax when they moved out of state.Brilliant plan!That’s why it is called the “Exit Tax.”

This so-called Exit Tax is two percent of the gross sale price, without regard to whether there is a capital gain on the sale or not.For example, you could have paid $400,000 for your house in 2008 and sold it in 2013 for $300,000, (a loss of $100,000), but still have to pay $6,000 to the State of New JerseySo, even though you lost money on the sale, you have to send 2% to the State.But, and this is the key point, you are paying the 2% as an estimated tax paymentThis forces the seller moving out of state to file a New Jersey tax return for that year.If you lost money on the sale, or there is no capital gain tax to pay, you get your entire 2% back.If there is a capital gain to pay, it would be deducted from the estimated tax payment and the rest would be refunded to you.No need to panic.In fact, if you look at the GIT/REP-1 form, you will see that it is in fact the estimated tax payment form, exactly like you would have to file if you were self-employed and had to make estimated tax payments.See link.

There are also many exemptions, the most common of which is that the property is your primary residence and you are exempt from capital gains under the Federal Tax Code (Section 121 of the Internal Revenue Code.See link In other words, it has been your primary residence for two out of the last five years, it was not used for rental or business purposes, you have not used the homestead capital gain exemption in the last five years, etc. (I.R.C. Section 121)See IRS Publication 523 for full explanation.

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