Is There an Exit Tax in New Jersey for Home Sellers?
Navigating New Jersey home sales? Understand the actual tax requirements for sellers and clarify common 'exit tax' misunderstandings.
New Jersey does not impose a specific “exit tax” for individuals selling their homes. The term often refers to a requirement for non-resident sellers of New Jersey real property to prepay a portion of their estimated gross income tax at the time of sale. This is not an additional tax but rather a mechanism to ensure that non-residents fulfill their state income tax obligations on any gains from the property sale. This prepayment is a credit against the seller’s actual New Jersey income tax liability, which is later reconciled when filing an annual tax return.
Understanding the New Jersey Non-Resident Seller’s Estimated Tax
The estimated tax obligation for non-resident sellers in New Jersey is a prepayment of the state’s Gross Income Tax on any profit realized from the sale or transfer of real property. This requirement was established to ensure that individuals who are not permanent residents of New Jersey, but derive income from sources within the state, fulfill their tax responsibilities.
For the purpose of this tax, a “non-resident” is generally an individual who does not consider New Jersey their permanent legal home or domicile. Even if an individual maintains a permanent home in New Jersey, they are considered a non-resident if they spend 183 days or fewer in the state, and New Jersey is not their domicile. Domicile is the place one considers their true home, where they intend to return after any absence, and is determined by various factors such as voter registration, driver’s license, vehicle registration, and family ties. Conversely, a New Jersey resident is an individual domiciled in the state or one who maintains a permanent home and spends more than 183 days there during the tax year.
Calculating and Determining the Payment Obligation
The estimated tax payment for non-resident sellers is calculated as the greater of two amounts: either 8.97% of the net gain from the sale or 2% of the total sales price (consideration). The “net gain” is determined by subtracting the adjusted basis of the property from the selling price, similar to federal tax calculations. The adjusted basis typically includes the original purchase price plus the cost of any capital improvements, minus any depreciation.
Despite these general rules, specific conditions and scenarios may exempt a seller from this estimated payment or qualify for a waiver. For instance, if the property sold was used as a principal residence and qualifies for exclusion under Section 121 of the Internal Revenue Code, the seller may be exempt. Additionally, sales resulting in a loss, or sales where the total consideration is $1,000 or less, may also be exempt from the prepayment requirement.
The estimated tax payment is also not required if the seller is a resident of New Jersey and intends to continue maintaining a permanent residence in the state after the sale. These exemptions and waivers are typically documented through specific forms, such as the GIT/REP-3, which outlines various seller’s assurances. If an exemption applies, the seller is not required to make the estimated tax payment at the time of closing.
The Payment Process and Required Forms
The estimated tax payment for non-resident sellers of New Jersey real property is typically handled at the time of closing. The seller, buyer, and closing agent, such as an attorney or title company, all have roles in this process. The closing agent is responsible for ensuring the correct forms are completed and the estimated tax payment is submitted.
New Jersey uses a series of Gross Income Tax/Real Estate Property (GIT/REP) forms to facilitate this estimated payment and reporting. Form GIT/REP-1, the Nonresident Seller’s Tax Declaration, is used by non-residents who owe the estimated tax payment and is submitted with the payment at closing. If a non-resident seller prepays the estimated tax prior to closing at a regional tax office, they would receive a GIT/REP-2, Nonresident Seller’s Tax Prepayment Receipt, to be submitted at closing.
Form GIT/REP-3, the Seller’s Residency Certification/Exemption, is used by sellers who are residents of New Jersey or who meet one of the specific exemptions from the estimated tax payment. This form certifies the seller’s residency or exemption status and is submitted at closing to avoid the prepayment.
Final Tax Filing and Adjustments
The estimated tax payment made at closing by a non-resident seller is a credit towards their overall New Jersey Gross Income Tax liability for the tax year. This prepayment ensures that the state receives a portion of the tax owed on the real estate gain, even if the seller no longer resides in New Jersey. The seller must then file an annual New Jersey Gross Income Tax return, Form NJ-1040NR (Nonresident Income Tax Return), to report the sale and reconcile their actual tax liability.
On the Form NJ-1040NR, the estimated payment made at closing is reported as a credit, allowing for a precise calculation of the final tax due or refunded. If the estimated payment exceeded the actual tax liability, the seller may be eligible for a refund. Conversely, if the actual tax liability is greater than the amount prepaid, additional tax will be due. The annual tax return is typically due by April 15th of the following year, aligning with the federal tax deadline.