How Do I Avoid New Jersey Exit Tax?

Selling a home in New Jersey and moving out of state? You may have heard about the so-called “New Jersey Exit Tax.” This term is misleading. Yet, the tax itself is real—it is actually a withholding tax on real estate sales. The good news? There are specific methods that can be applied in order to minimize or even prevent paying more than necessary.

Understanding the NJ Exit Tax

New Jersey necessitates non-residents selling property in the state to prepay surrounding tax liabilities before leaving. The state applies the higher of:

8.97% of the capital gain from the sale
2% of the total sale price

If the amount withheld exceeds the actual tax due, a refund can be requested by the sellers by filing a state tax return.

How Do I Avoid New Jersey Exit Tax

Preventing the New Jersey Exit Tax

Complete avoidance is not always possible as stated before. However, the following actions can be taken in order to prevent such tax:

1. Prove NJ Residency at the Time of Sale

The withholding tax only applies to non-residents. In the case that you are still a New Jersey resident when selling the home, qualification for an exemption is possible.
Provide documentation like a driver’s license, voter registration or recent tax filings to establish the residency.

2. Sell at No Capital Gain

If the home sale does not result in a taxable gain, individual taxpayers might be exempt from the withholding.
Purchase costs, improvements as well as associated selling expenses should be recorded in order to report the gain properly (or lack thereof).

3. Utilize the Primary Residence Exclusion

Homeowners may exclude up to $250,000 in capital gains ($500,000 for married couples filing jointly) in the case where they meet the two-year residency and use test.
Taxable gains can be lowered or eliminated considerably which also reduces the exit tax.

4. File for a Refund After Closing

If too much tax is withheld at closing, sellers can file a New Jersey Nonresident Income Tax Return (Form NJ-1040NR) in order to claim a refund.
Accuracy should be established in terms of reporting income and deductions as well as credits in order to recover any overpaid amount.

5. Consider a 1031 Exchange

If individuals reinvest proceeds into a like-kind exchange property under IRS Section 1031, the capital gains tax may be deferred.
The IRS rules should be strictly adhered to with smart planning.

Final Thoughts

New Jersey’s exit tax is not an additional tax. It is a prepayment of tax obligations. It is possible to lower or avoid surprise withholdings by acknowledging the exemptions, recording transactions and planning the sale in a smart way. CPA experts familiar with New Jersey real estate tax laws can present a professional approach.