Selling a home and moving out of state is already a stressful time. The logistics of packing, finding a job, enrolling children in school and starting a new life can be overwhelming.
But for people selling a home in New Jersey, there’s an added wrinkle: a tax law sometimes known as the “exit tax.” In some cases, this unusual provision in state law requires people moving out of state to pre-pay the taxes on the sale of their home.
A recent poll found that 44% of people who live in New Jersey expect to leave the state in the next few years. That adds up to a lot of homeowners who might run into this tax. Here’s what they need to know.
What is the exit tax?
New Jersey’s exit tax is formally known as the Gross Income Tax Required Estimated Payment. It amounts to either 10.75% of the profit on the home sale or 2% of the sale price — whichever is greater.
On a house that you bought for $350,000 and sold for $500,000, this would amount to a tax of $16,125 (a tax of 10.75% on the $150,000 profit).
You still must pay a tax if you lost money on the sale. If you bought a house for $450,000 and sold it for $400,000, you’d pay a tax of $8,000 (2% of the sale price).
This tax must be paid before the home sale can be finalized, but the money you spend can be refunded in whole or in part after you file your tax return the following year. It just depends on your overall financial circumstances and tax rate.
Why does this tax exist?
Essentially, this tax requires people who are moving out of state to pre-pay the state taxes they will owe on the gain on the home sale in the following year. Why? Because if you don’t pre-pay, you might not fill out a New Jersey state income tax return at all, the state says.
Since the tax law went into effect in 2004, everyone who sells a home in the state is required to fill out a form to satisfy this requirement as the deal is closing.
Who pays the exit tax?
While everyone has to file the tax form when you sell a New Jersey home, not everyone has to pay the tax. Considering nearly seven in 10 Americans have cried over money at some point, knowing there are numerous exemptions can help ease financial stress.
These are the two most common:
You likely won’t pay the exit tax if…
You’re staying in New Jersey. People moving to another home in-state are considered residents for tax purposes, and will just handle the taxes on the sale in the regular income tax process. If you’re moving out of state, however, you’re considered a non-resident and are more likely to pre-pay.
You lived in the home for a long time. The other big exemption is known as the Principal Residence Exclusion. This keeps you from having to pay tax on the sale of your primary home. You qualify if you lived in the home as your primary residence for two years or more out of the past five years and haven’t used the exclusion on any other homes in that period. Individuals can exclude up to $250,000 in home sale profit, and married couples filing jointly can exclude up to $500,000.
Other less common exemptions include properties that sell for less than $1,000, cemetery plots, homes sold in a short sale, homes sold by soldiers on active duty and some transactions facilitated by a relocation company.
You likely will pay the exit tax if you rented out the home or lived in it for a short period of time. In those cases, you won’t qualify for the Principal Residence Exclusion and will likely need to pay the exit tax.
How to cover the exit tax charge
You may not be able to avoid the exit tax when leaving New Jersey. If this comes as a surprise, the unexpected expense can be stressful for someone who’s already dealing with down payments and renovations on a new home. But don’t worry. There are ways to manage even an unexpected tax like this one. Here are some options.
Personal loan. These unsecured loans can be a fast way to access cash you need, often within one or two business days. Personal loan interest rates can be steep, however, so pay close attention before deciding to take one out.
Balance transfer card. If you already have significant credit card debt, you might consider consolidating the tax payment with your old cards on a balance transfer card. These cards often have low or 0%
introductory interest rates for a short period of time. Just make sure to pay off your balance before the introductory period ends.
Home equity loan. Though this can be tricky when you’re moving, you may be able to use the equity in a property you hold to access cash. Home equity loans use property as collateral, meaning that you can often get a lower interest rate than a personal loan — but failure to repay the loan on time puts your property at risk of foreclosure.
401(k) loan. If you have a retirement plan, you may be able to borrow against the money you’ve saved to pay this tax. However, this can cause you to incur serious tax penalties down the line, as well as impact your future nest egg.
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