Bamboozled: Understanding N.J.'s misunderstood 'exit tax' (2024)

New Jerseyans say they're Bamboozled when it comes to taxes.

Property taxes. Estate taxes. Inheritance taxes. Income taxes. Business taxes.

We sure have a lot to complain about, and the high taxes in the state are helping to push many residents to move.

New Jersey's richest guy -- David Tepper -- recently ended his love affair with the Garden State in favor of Florida.

Florida has no estate tax. It has no inheritance tax.

And it has no income tax. The Star-Ledger's Tom Moran recently wrote about the math.

"Florida has no income tax, while New Jersey's top rate is 9 percent. So if Tepper earns $500 million this year - a modest sum for him -- the move south could save him about $45 million,"Moran wrote.

If you've ever considered bailing on New Jersey, you've probably heard about another tax: the so-called "exit tax."

It would be just like New Jersey to let the door hit our behinds on the way out, but the term "exit tax" is really a misnomer.

The exit tax has probably reached the status of "urban legend," said Cynthia Fusillo, a certified public accountant with Lassus Wherley in New Providence.

"Much of the folklore surrounds the 'exit' of New Jersey residents retiring to states with lower or no state income tax," Fusillo said. "The exit tax is not an additional tax, a special tax or even a new tax, but merely a prepayment of the tax owed on the sale of real property by non-residents."

Fusillo said the tax is really just an estimated tax payment required at the time of a real estate closing to prevent non-residents from evading tax on the sale of second properties or investment homes.

The legislation, enacted on June 29, 2004, says a deed can't be recorded unless the estimated tax is paid.

Here's how it works.

When you sell a house in New Jersey, you're required to pay income taxes on the taxable gain whether it's your principal residence, second home or an investment property, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

This applies to residents, non-residents or soon-to-be former residents.

Kiely said this is how you calculate the taxable gain:

The sales price minus the costs of sale equals "net proceeds." The costs of sale include sales commissions, legal fees, realty transfer fees, etc. Next, subtract the "adjusted basis" of the property sold, which is tax speak for your home's original cost plus improvements made over the years.

Net proceeds minus tax basis equals the gain on the sale, Kiely said.

If the house sold was your principal residence for 24 out of the last 60 months, you get one more adjustment to arrive at the taxable gain. If you're single, you can subtract $250,000 from the home's gain, or you can subtract $500,000 if you are married filing jointly. This $250,000/$500,000 adjustment does not apply to second homes, vacation homes or investment properties, Kiely said.

If when the math is done you have a taxable gain, you must include it on your New Jersey Resident, New Jersey Part-Year Resident or New Jersey Non-Resident income tax return.

"The problem New Jersey had was people who moved out of New Jersey or those who never resided here would take their home sale gain and never pay the state its due," Kiely said.

The state made sure it would get its money with the 2004 change in law, which prohibits a county recording officer from recording any deed for the sale of real property unless accompanied by the appropriate form and an estimated tax payment.

That's the "exit tax."

HOW MUCH?

So what do you have to pay?

The estimated tax due is equal to the gain reportable for federal income tax purposes, if any, multiplied by the highest New Jersey tax rate for that year, Kiely said.

"The estimated tax payment shall not be less than 2 percent of the consideration for the sale as stated on the deed," Kiely said. "So if the non-resident sells the property for a loss, they must still make an estimated tax payment of 2 percent of the sale amount."

If you sell your New Jersey home and buy a new home in New Jersey, you would file formGIT/REP-3, checking box No. 1, and you wouldn't have to worry about the estimated tax payment.

If the house you sold was used exclusively as your principal residence for 24 of the past 60 months, you would check box No. 2 on form GIT/REP-3.

Vacation homes and investment properties are different.

If you sell your second home while you are a New Jersey resident, you would pay the tax when you file your New Jersey Resident income tax return, Kiely said.

But if you move to Florida and then sell your second house in the next calendar year, you would be required to fileGIT/REP-1 and make the estimated tax payment, he said.

When you file your New Jersey Part-Year Resident or Non-Resident tax return, the actual tax owed would be calculated on your actual New Jersey income.

The tax rates start at 1.4 percent and rise to 8.97 percent, Kiely said.

"As a non-resident, you made an estimated tax payment of 8.97 percent of the gain or 2 percent of the sales price, whichever was higher," Kiely said. "Accordingly, you would be due a refund, especially if you paid in the 2 percent of the sales price and actually lost money on the sale."