How is the Exit Tax Calculated in New Jersey?

If individuals are selling a home in New Jersey and planning to leave the state, they might have come across the term New Jersey Exit Tax. It is actually a withholding tax on real estate sales to make sure that the state collects taxes owed before sellers relocate. We present how such tax is calculated as outlined below:

The NJ Exit Tax Calculation

The New Jersey Exit Tax applies to non-residents selling property in the state. Instead of waiting for sellers to file a tax return, the state necessitates a withholding at closing. The calculation follows the two methods below:

8.97% of the taxable gain on the property sale, or
2% of the total sale price, whichever is greater.

This methodology makes sure that New Jersey collects at least a portion of the capital gains tax from the sale even if the seller no longer files a New Jersey tax return.

Example NJ Exit Tax Calculation

The following scenarios can be taken into consideration in order to illustrate how the tax is determined:

Scenario 1: High Capital Gain

Home Purchase Price: $300,000
Sale Price: $500,000
Taxable Gain: $200,000
Exit Tax: 8.97% of $200,000 = $17,940

Scenario 2: Low Capital Gain but High Sale Price

Home Purchase Price: $480,000
Sale Price: $500,000
Taxable Gain: $20,000
8.97% of $20,000 = $1,794 (lower than 2% of the sale price)
Exit Tax: 2% of $500,000 = $10,000 (higher amount applies)

Key Takeaways

If 8.97% of the taxable gain is greater than 2% of the sale price, the seller is taxed on the gain.
If 2% of the sale price is greater, the withholding is based on the total sale price.

Can You Get a Refund?

Yes! If the amount withheld exceeds the actual tax liability, a New Jersey Nonresident Income Tax Return (Form NJ-1040NR) can be filed after the sale to claim a refund.

Conclusion

The New Jersey Exit Tax is not an extra fee but a prepaid withholding tax. Such tax is established to make sure that real estate taxes are paid. Acknowledging the surrounding rules can aid in minimizing the impact. CPA experts can present professional assistance for exemption or refund possibilities.