Capital Gains & the NJ Exit Tax When Selling a Home

Selling can bring a tax bill large enough to change the decision, between federal capital gains and New Jersey's so-called exit tax. The good news is that for most primary-home sellers the bill is smaller than they fear, once you understand how the rules work. This is general information, not tax advice, so confirm your own situation with a tax professional.

Federal capital gains and the primary-residence exclusion

At the federal level, you may owe capital gains tax on the profit from a sale. But the primary-residence exclusion lets many sellers exclude a large amount of gain, up to $250,000 if single or $500,000 if married filing jointly, when the home was your main residence for at least two of the last five years. For most owners of a long-held primary home, that exclusion covers all or most of the gain.

The New Jersey 'exit tax', what it actually is

New Jersey's exit tax is not a separate, extra tax. It is an estimated income tax payment collected at closing, mainly from sellers who are moving out of state, to make sure New Jersey gets any tax it is owed before you leave. It is credited against your actual New Jersey tax when you file, so if you owe less, you get the difference back. Rates and thresholds change, so verify the current rules and amounts with a tax professional.

Why the tax bill can change your decision

For an investment property or a long-vacant home, the combined tax on a sale can be steep enough that holding, or renting, can cost less than selling, which is exactly why some owners keep a property rather than cash out. Whether that math favors selling, renting, or holding depends on your basis, your gain, your residency, and current rates, so run the numbers with a tax advisor before you list.