'Exit Tax' before retiring, selling house in New Jersey

By Karin Price Mueller/The Star-Ledger  Q. I plan to retire in 2013, sell the house and move out-of-state. My house is currently worth about $1 million and I am wondering if the house sells for more, how this so-called "NJ Exit Tax" is calculated. Can you please clarify what this tax is all about and what the tax-rate will be? What is the basis for the tax (sales price minus original price?), how do home improvements (pool, new deck, fence, renovations) and replacement costs (air conditioning, water heater) impact the tax?

— Califon Curious

A. There are several charges called "taxes" that you may be asking about.

First, the charge known as an "exit tax," the tax paid by a non-resident who sells a property located in New Jersey, said Howard Hook, a certified financial planner and certified public accountant with EKS Assoc. in Princeton.

New Jersey also has transfer taxes paid by a seller who sells a home in New Jersey, regardless of whether they are a resident or not. And, New Jersey has a "mansion tax" for homes sold in excess of $1 million, Hook said. This tax is equal to 1 percent of the price, but this fee is paid by the purchaser, not the seller of the home.

Back to the "exit tax." 

Hook said this is not really an additional tax, but it’s an estimated tax payment required to be paid by someone who is a non-resident who sells real property located in New Jersey in advance of the actual tax calculation on the sale, he said.

"The amount of the payment is equal to the highest rate of tax in New Jersey in the year of sale multiplied by the gain on the sale," Hook said. "The gain on the sale is calculated the same as on a federal tax return, which is, in simple terms, sales price less adjusted basis, which is the purchase price plus improvements less depreciation taken."

This payment is then shown on the taxpayer’s Non Resident New Jersey Income Tax Return as a prepayment against any tax calculated when filing the New Jersey return.

Hook said the purpose of the "exit tax" is to ensure that New Jersey does not get stiffed on taxes because the non-resident isn’t in the state.

"It would be costly if New Jersey had to track down non-residents who owed taxes on these sales," he said. "Instead, requiring that this estimated tax be paid before a deed can be recorded ensures that New Jersey receives the tax revenue."

Hook said the home improvements you mentioned would add to the basis of the property and thus reduce the tax owed on the tax return. It may or may not reduce the estimated tax payment, however, because New Jersey law requires a minimum of 2 percent be paid in as an estimate on the sales price. Because of this minimum, Hook said, the taxpayer may wind up with a refund once they file the actual New Jersey Non Resident Tax Return.

For further information about this tax you can download NJ Publication TB-57 from the Division of Taxation’s web site.