Yes, New Jersey has what’s commonly referred to as the “Exit Tax,” but it’s not really a tax specifically for leaving the state. Instead, it refers to the requirement for non-residents who sell property in New Jersey to pay an estimated tax on the sale proceeds.
What is the Exit Tax?
When a non-resident sells property in New Jersey, they are required to prepay estimated taxes on any capital gains from the sale of the real estate. This came about because many people were moving out of the state, selling their properties, and then avoiding paying state taxes on the capital gains they made.
Here’s how it works:
- Who it Applies to: The “Exit Tax” applies only to non-residents. If you move out of New Jersey and then sell your property while living in another state, you’ll be subject to this estimated tax.
- How It’s Calculated: New Jersey requires that 2% of the sale price, or 8.97% of the profit (whichever is higher), be withheld at closing as an estimated tax. This is meant to cover any capital gains tax that would be owed.
- Filing the Return: After the sale, you will need to file a New Jersey tax return to declare the actual amount of tax owed. If the estimated tax payment exceeds your liability, you’ll get a refund.
How to Avoid or Mitigate the Exit Tax
If you’re planning to sell your property and move out of New Jersey, here are a few steps you can take to avoid surprises:
- File as a Resident Before Selling: If you sell your home before you officially change your residency, you might avoid the Exit Tax.
- Understand the Real Capital Gains: Work with an accountant to ensure you’re not overpaying by properly calculating your capital gains.
- Filing a Tax Return: After the sale, always file your tax return to either confirm the amount owed or claim your refund.
This tax is designed to prevent people from skipping out on paying their New Jersey tax liabilities, even if they’ve moved to a different state. While it’s not exactly a tax for moving out, it feels that way for people selling property right after a move!