The term New Jersey Exit Tax appears in the case of selling a home in New Jersey and moving out of the state. It might sound like a penalty fee for leaving the state. However, it is actually a withholding tax liability on real estate sales. Below, we present where such a tax came from and who introduced it.
The Origins of the NJ Exit Tax
The New Jersey Exit Tax was introduced in 2004 under then-Governor Jim McGreevey. However, it is not an extra tax—it is a withholding mechanism in order to make sure that non-residents pay their New Jersey real estate tax and NJ capital gains tax before leaving the state.
The purpose of this tax can be outlined as below:
Tax Compliance: Before 2004, non-residents who sold property in New Jersey and left the state were able to prevent paying the required taxation burden. This law establishes that sellers complete their taxation obligations upfront.
Withholding to Secure Payment: Instead of chasing former residents for unpaid taxes, the state necessitates a withholding of either 8.97% of the taxable gain or 2% of the sale price, whichever is greater.
Preventing Revenue Loss: With many people moving out of New Jersey, the state would like to avoid revenue gaps from unpaid real estate taxes.
Exit Tax for Sellers
The fundamental information is outlined below if you are selling a home in New Jersey:
Non-Residents Only: If individuals are no longer New Jersey residents at the time of sale, they are subject to such withholding tax.
Not a Penalty: The tax isn’t an additional charge. It’s a prepayment of the required NJ capital gains tax on the property sale.
Refund Possible: If the withholding surpasses the actual tax liability, individuals can file a New Jersey Nonresident Income Tax Return to claim a refund.
Conclusion
The New Jersey Exit Tax was established to prevent tax evasion in case property owners move out of the state. Indeed, it may feel like an extra burden. But it’s simply a way to make sure that taxes are paid on real estate sales. If you are selling a home in New Jersey and moving out of state, tax professionals present assistance in determining the qualification criterion for exemption or a refund.