LIVINGSTON, NJ — When residents of New Jersey sell a home with the intent of moving out of the state, they are required to pay a standard tax rate on the profit from the sale. This tax is to be paid when someone moves, instead of when that resident would normally file a state income tax return.
But one local expert in titles and home closings said that what many refer to as an "exit tax" in New Jersey is actually something a little different than that description implies.
"The Exit Tax is not necessarily a 'tax,'" said Linda Percoco, owner of Max Title Agency of Livingston. "I have done closings for people who moved to another state and kept their NJ property until after they established residency in that state. If you are moving and have not established residency yet, there is no tax. This only applies if you moved and established residency."
According to the instructions on the form, the seller is considered to be a nonresident unless a new residence (permanent place of abode, domicile) has been established in New Jersey and the new residence is listed there. Part-year residents are considered nonresidents, according to Percoco, who is both a title agent and a settlement agent.
"I work with your attorney and your accountant, and I am responsible for accurate disbursement of funds at a closing," she said.
At a closing, the settlement agency must file a GIT REP1 form to the state of New Jersey and withhold 2 percent of the purchase price "until they file their final New Jersey tax return," Percoco added.
"This is usually a surprise to the seller as they don’t anticipate the additional funds being held in escrow," she said. "I am not an accountant, lawyer or a financial planner, but if you plan on moving out of the state, this is something you should know about and speak to your advisors about."
What many mistakenly refer to as the state's "exit tax" is actually a required estimated tax payment to make sure a nonresident seller files a New Jersey tax return, according to Percoco. Someone who sells a property in New Jersey as a nonresident is required to file the NJ GIT/REP-1 form.
"New Jersey requires you to withhold the amount of either 8.97 percent (New Jersey's highest tax bracket) of the profit, or 2 percent of the total selling price, whichever is higher," said Percoco. "If you continue to rent your condo and do not sell, then the exit tax is not relevant. You just need to continue filing a nonresident tax return for your rental activities in New Jersey."
Percoco, who for the last 15 years has independently owned and operated Max Title Agency of Livingston, added that if someone wants to sell his or her property and have a taxable gain, then he or she is "required to make an estimated tax payment of the higher of 8.97 percent of the profit (capital gain) or 2 percent of the selling price."
"When you file your New Jersey tax return, the actual capital gain tax that you owe will be deducted from your estimated tax payment and the rest will be refunded to you," she said.
Even if a homeowner sells the property at a loss, or if there is no capital gain, then one must still make an estimated tax payment of 2 percent of the sale amount, according to Percoco.
"In this case, you do not actually owe any tax, so you will get the entire 2 percent withholding back when you file your New Jersey nonresident tax return," she said. "This is just New Jersey’s way of getting you to file a final tax return for that year; it’s not an 'extra tax.'"
Percoco said that each specific situation will dictate one's required estimated tax payment and how much he or she receives back in the form of a tax refund.
"So be sure to consult with a tax professional with any questions about your specific situation," she said, adding that the voucher is attached to the form that will be submitted with the Deed for recording.
Percoco shared the following instructions, which are attached to the form:
"The seller must complete the estimated tax voucher, including their social security number or federal tax identification number. The amount of the estimated tax payment is determined by multiplying the gain from the sale of the property by the highest gross income tax rate (8.97 percent). In the case of estates and trusts, the gain is determined without taking into consideration any distributions made to the beneficiaries during the taxable year.
"In no case can the estimated payment be less than 2 percent of the consideration received for the sale. Payment must be in the form of check or money order made payable to the State of New Jersey - Division of Taxation. The seller must give the completed GIT/REP-1 to the settlement agent (usually the buyer’s attorney or the title company) at closing, along with the required estimated income tax payment.
"The settlement agent must file the original GIT/REP-1, payment, and deed with the appropriate county clerk for recording. If the form is not completed in its entirety, or if the settlement agent does not submit the original form and payment with the deed, the county clerk will not record the deed. The county clerk will attach the top portion of Form GIT/REP-1 to the deed when it is recorded and will forward the bottom portion (NJ)."
Max Title Agency, located at 70 South Orange Avenue, Suite 225 in Livingston, can be reached at (973) 410-0205. Percoco can also be reached directly at firstname.lastname@example.org.