Understanding the New Jersey Exit Tax: What You Need to Know

Table of Contents

1. Introduction
2. What is the New Jersey Exit Tax?
3. The Confusion with the Realty Transfer Fee
4. Understanding Gross Income Tax
5. Tax Exemptions for Primary Residences
6. When Does the Exit Tax Apply?
7. Calculating the Exit Tax
8. Escrowing the Exit Tax
9. Filing an A-3128 Form for Early Refund
10. Conclusion

What is the New Jersey Exit Tax?

One question that frequently arises when selling a home in New Jersey and planning to move out of state is whether there is an "exit tax" that needs to be paid. However, it is important to note that there is no such thing as a New Jersey exit tax. This misconception often stems from confusion between the realty transfer fee and the exit tax. While every transaction in New Jersey incurs a transfer tax paid to the state, it does not equate to an exit tax.

The Confusion with the Realty Transfer Fee

To understand the distinction, it is crucial to differentiate between the realty transfer fee and the exit tax. When a property is sold in New Jersey, a transfer tax is levied. This fee is calculated based on the sales price of the property. However, it is important to note that this transfer tax is not synonymous with an exit tax.

Understanding Gross Income Tax

In New Jersey, when a property is transferred, a gross income tax form must be recorded with the deed. The purpose of this form is to determine whether any taxes are due on the sale of the property. In most cases, individuals who sell their primary residence have no tax due, as they are eligible for certain exemptions.

Tax Exemptions for Primary Residences

If the property being sold is the primary residence of the seller, there are tax exemptions in place. To qualify for these exemptions, the property must have been the primary residence for at least two of the last five years. Individuals filing as single taxpayers can exempt up to $250,000 of the gain, while married couples filing jointly can exempt up to $500,000.

When Does the Exit Tax Apply?

The concept of the exit tax primarily comes into play when dealing with non-resident sellers. If a seller has already established their primary residence outside of New Jersey, their property may be subject to capital gains or other taxes. In such cases, the title company handling the transaction is required to escrow an amount of money equal to 2% of the gross sales price of the house or 10.75% of the anticipated gain.

Calculating the Exit Tax

Calculating the exact exit tax can be complicated, considering variables such as the sales price and anticipated gain. Online resources can assist sellers in calculating the transfer tax specific to their property in New Jersey. It involves entering the sales price of the property into a calculator, which provides the corresponding transfer tax amount.

Escrowing the Exit Tax

When the exit tax is applicable, the title company involved in the transaction will be required to escrow the calculated amount at the time of closing. The purpose of escrowing this amount is to ensure that the non-resident seller files a non-resident tax return at the end of the year. By holding more than their entitled share, the state can refund the excess amount once the tax return is filed.

Filing an A-3128 Form for Early Refund

If a seller feels that the escrowed amount is excessive and does not wish to wait until their next tax return, they have the option to file a Form A-3128. This form can be submitted to the address or branch office provided on the form itself. By proactively submitting this form, sellers can request a review of their tax liability and potentially receive a refund without delay.

Conclusion

In conclusion, there is no official New Jersey exit tax. The term often refers to the confusion between the realty transfer fee and the actual tax obligations when selling a property. While the transfer tax is applicable to all transactions, the exit tax specifically impacts non-resident sellers who have established permanent residency outside of New Jersey. To fully understand the implications and calculate the taxes, it is recommended to consult with a real estate attorney, a title company, or an accountant.

Highlights

• There is no New Jersey exit tax; it is often confused with the realty transfer fee.
• The realty transfer fee is a tax levied on property transactions in New Jersey.
• Gross income tax forms must be recorded with the deed when a property is transferred.
• Primary residences are generally exempt from capital gains taxes on the sale of the property.
• Non-resident sellers may be subject to an escrowed amount known as the exit tax.
• The exit tax ensures non-resident sellers file a non-resident tax return.
• Sellers can file a Form A-3128 to potentially receive a refund sooner.

FAQ

Q: Is there a New Jersey exit tax? A: No, there is no official New Jersey exit tax. The term often refers to confusion with the realty transfer fee.

Q: Who is affected by the exit tax? A: The exit tax primarily affects non-resident sellers who have already established permanent residency outside of New Jersey.

Q: Are primary residences exempt from the exit tax? A: In most cases, primary residences are exempt from the exit tax, as long as certain criteria are met.

Q: How can I calculate the exit tax on my property? A: Online resources provide calculators where you can enter the sales price of your property to determine the corresponding transfer tax.

Q: Can I request an early refund of the escrowed exit tax amount? A: Yes, sellers have the option to file a Form A-3128 to request a review of their tax liability and potentially receive a refund without waiting for their next tax return.