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An Expert Explains: Is There Really a NJ Exit Tax?

Last updated on October 31, 2019 at 11:29 am

Have you ever been asked the question, “When is a tax not really a tax?”  Well the answer is, “When it is an exit tax – which is really a prepayment!” So, do you really know how the so-called NJ exit tax works?

When New Jersey residents sell their homes and prepare to move out of state, you must pay a standard tax rate on the profit from the sale. You need to pay this tax when you move, rather than at the time you would normally file your state income tax return.

Because of the timing of the state tax requirement, this policy has been thought of as being an NJ exit tax because it is paid upon “exiting” the state.

Where the “NJ Exit Tax” Came From

New Jersey originally passed this legislation under the guidance of former Governor Jim McGreevy. At the time, the objective was to ensure that anyone moving out of state could not do so without first paying taxes on income gained from the sale of their home.

Over the years, this concept has taken root in the state, with the result being that residents who are relocating believe they are paying an additional tax (what people call the NJ exit tax) on the sale of their homes as they move out of state.

Instead, it is really a prepayment of state taxes you they already owe, based on profit from the sale.

What It Actually Is

Despite the confusion caused by calling it an exit tax, the law simply requires the seller to pay state tax in advance, calculated as follows: New Jersey withholds either 8.97% of the profit or 2% of the selling price, whichever is higher.

This estimated tax is adjusted when the seller files a New Jersey tax return for the year of the sale. The seller must pay this tax prior to leaving the state, even if there is no gain from the sale. But the state takes all that into account once the year-end income tax is filed.

So, for example, if you lost money on the sale of your house, and 2% tax was prepaid before you left the state, you would receive a full refund when you file your New Jersey state income tax.

If you do realize a capital gain on the sale, it would be deducted from the estimated tax payment you have made when exiting and the remainder would be returned to you.

Although the prepayment obligation is an inconvenience for a seller moving out of New Jersey, the tax is refunded or reduced as appropriate at the time of filing. If you are thinking of selling, checking out these pro tips for selling your home fast.

Meet Our Expert

Ken Bagner is a Member in Charge of Sobel & Co. LLC. He is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. Plymouth Rock Assurance in NJ is proud to partner with NJSCPA to bring you valuable tips about your financial health. Qualified members of the NJSCPA can receive a discount on their car insurance through Plymouth Rock Assurance New Jersey.

7 thoughts on “An Expert Explains: Is There Really a NJ Exit Tax?

  1. My friend just sold his house and the State is asking for this money to be held in escrow. The house sold for $395K and they want over 12K withheld. Since he is remaining a NJ resident, can he get the money released now or will the State hold on to it until he files his taxes?
    Thank You

    1. Hi Sean,

      Since house sales are complicated beasts and we don’t have all of the specifics on your friends situation, this would be a great question for his attorney handling the transaction. If his attorney works on a flat fee for real estate transactions (a lot do) they should be readily accessible and shouldn’t cost anything extra.

  2. Is there an exemption for active duty military moving out of NJ due to PCS orders? If so, how long does the exemption last? If my husband retires, and we stay in NJ until he finds work, for how long after retirement can we claim the exemption?

    1. what if the home was put in our name years ago from a relative, and selling price was total profit you pay 8.97% almost $22,000 do you get all that back?

  3. What are the deductions that I can make on the house we have earned for 27 years? We have replace the roof drilled for a deeper well replaced the Hvac system and total replacement of the water softener system along wth the water heater.
    Can these cost helo reduce our $220,000

    Thank you

  4. You are supposed to be able to trade up your house within 2 years without being taxed. This doesn’t make sense and you should get your money back from my understanding. How does that fit into this framework?

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