Qualifying for the NJ Exit Tax Exemption

The “New Jersey exit tax” is not a separate tax for moving out of the state. It is a prepayment of estimated income tax on the gain from a real estate sale, required only for non-residents. This system ensures New Jersey collects taxes that might be difficult to recover after a seller leaves. Sellers who are New Jersey residents or who meet specific criteria are exempt from this prepayment and can avoid having funds withheld at closing.

Understanding New Jersey Residency for Tax Purposes

For real estate sales, New Jersey defines a resident as an individual who considers the state their permanent home, or domicile, which is the place they intend to return to after being away. If a seller is a legal resident of New Jersey at the time of the sale and will continue to be a resident after the closing, they are not subject to the withholding.

Conversely, a non-resident is someone who does not maintain a permanent home in New Jersey. This includes individuals who are moving out of the state as part of the sale and will establish a new domicile elsewhere. Part-year residents are also considered non-residents for this tax. The state’s primary concern is collecting tax on the property’s appreciation from those who will no longer be filing annual resident income tax returns.

Conditions for Exemption from the Tax Prepayment

Several conditions allow a seller to be exempt from the estimated tax prepayment. The most common exemption is for sellers who qualify for the federal principal residence gain exclusion under Internal Revenue Code Section 121. This provision allows a single filer to exclude up to $250,000 of gain, and married couples can exclude up to $500,000. To qualify, the seller must have owned and used the property as their primary home for at least two of the five years before the sale.

An exemption also exists if the property is sold at a loss or with no capital gain. The prepayment is based on the seller’s profit, so if there is no profit, there is no tax to prepay. This is determined by subtracting the property’s adjusted basis (original purchase price plus capital improvements) from the sale’s net proceeds.

Sellers who are and will remain New Jersey residents after closing are also exempt. These individuals settle any tax liability from the sale when filing their annual New Jersey Gross Income Tax return. Other specific exemptions include transactions where the total consideration is $1,000 or less or certain transfers like a deed in lieu of foreclosure.

Required Forms and Documentation for Exemption

To formally claim an exemption, a seller must complete the Seller’s Residency Certification/Exemption form, also known as Form GIT/REP-3. This document certifies to the buyer and closing agent that no tax withholding is necessary. The form can be obtained from the New Jersey Division of Taxation’s website or through real estate professionals.

In the “Seller’s Assurances” section of the form, the seller checks a box corresponding to the specific exemption they are claiming. For instance, if the exemption is based on the principal residence gain exclusion, the seller would check the box indicating the property qualifies under IRC Section 121. If claiming the “no gain” exemption, it is wise to have a worksheet prepared that shows the calculation of the adjusted basis and the resulting lack of gain.

How to Claim the Exemption at Closing

The seller is responsible for providing the completed and signed GIT/REP-3 form to the closing agent, who is often the buyer’s attorney or a title company representative. This should be done at or preferably before the scheduled closing date to prevent delays. The closing agent reviews the form to ensure it is properly completed.

Upon receiving a validly executed form certifying an exemption, the agent is authorized to forgo withholding the estimated tax from the seller’s proceeds. The form is then submitted with the deed for recording. County recording offices are prohibited from accepting a deed for a non-exempt sale without proof of the estimated tax payment.

Requesting a Refund After Closing

In situations where the estimated tax was withheld from the sale proceeds, but the seller was either exempt or the amount withheld exceeds their actual tax liability, a refund can be requested. This can occur if an exemption was overlooked or if a non-resident’s actual gain results in a lower tax than the amount prepaid. The prepayment is calculated as the higher of 2% of the sale price or 8.97% of the gain, which can lead to an overpayment.

To claim a refund, the seller must file a New Jersey Non-Resident Income Tax Return (Form NJ-1040-NR) for the year of the sale. On this return, the seller will report the capital gain from the property sale and calculate the precise amount of tax due. The amount withheld at closing is then claimed as a credit against the calculated tax.

The seller will need documents to complete the NJ-1040-NR, including the Form 1099-S issued after the sale, which reports the gross proceeds. A copy of the closing disclosure or settlement statement is also needed to show the exact amount of tax that was withheld. If the tax paid is more than the tax owed, the state will issue a refund.