The "Exit Tax" Myth - Molson Law

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    • 18 February 2021
    • Ashley Molson
    • Uncategorized

    The “Exit Tax” Myth

    WHAT IS THE NJ EXIT TAX? 

    The “exit tax” is really just another word for the  NJ realty transfer tax, but it also is not totally how it sounds. Let’s explore this more shall we? The Realty transfer tax can be thought of as a sales tax applied on any sale of real estate property in New Jersey. New Jersey will take their tax, like they always do, and they will send you a letter in the mail for being so gracious! Kidding. 😉

     

    So… When you are selling property in New Jersey, whether you stay in state or you move/live out of state, you will have to pay the realty transfer tax. There are different realty transfer tax rates for different classes of people / transactions, so be sure to speak to your attorney to see if you apply for any of the exemptions or deductions. 

     

    There are two base rates of the NJ transfer tax: 

    1. New Jersey resident taxpayers
    2. Non-New Jersey taxpayers. 

     

    So if you’re not a resident of New Jersey and you don’t have a tax return that you’re filing in New Jersey that’s when you would be paying a different tax rate. The best example I can give is: 

    You own property in NJ. You lived there for a while, but moved to Florida ten years ago. Now, while living in Florida, you sell your home. You will have to pay the NJ non-resident tax. 

    So what’s the big deal about the non-resident tax? Well… the non-resident tax is a little bit higher than the resident tax. And this is why they call it the “exit tax”. But, it’s not really an exit tax because you don’t pay it if you move to Florida from New Jersey that same year you sell your home… meaning you don’t pay it when you exit.

     

    So… What if you lived out-of-state for three years? A lot of title companies use the following rule of thumb when calculating the tax: If you’ve paid NJ State Income Taxes for 2 out of the last 5 years, the “exit tax” usually will not be applied to you. But, it’s case-by-case and we always defer to the title company to guide us accordingly on which tax applies because they are the ones who have deciding authority. 

     

    Do Buyers ever pay the exit tax? 99.9% of the time, Realty Transfer Taxes (are) paid by sellers. Sellers and Buyers CAN agree to have the buyer pay it, but it is not common.

     

    When do I pay it? You will pay the tax at closing. The tax comes out of the proceeds of your sale and gets sent to the state. 

     

    Can I know before we get to closing what it will cost? If you want to calculate what your realty transfer taxes will be, you can go online and there are Websites where you can plug the purchase price in and get the tax calculated for you. 

     

    I hope this article helps you get a better understanding of the realty transfer tax. Thank you for reading. This post is for educational purposes only and is not intended to be legal advice. No Attorney Client Relationship is formed by your reading of this article.

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