Will I owe the ‘exit tax’ if I change my residency to Florida?

Q. I’m a married New Jersey resident who has owned a house for 40 years but five years ago bought a home in Florida. We’re thinking of changing our residency to Florida. If in two years as non-residents we sell our New Jersey home, will we have to pay the exit tax?

— Considering

A. We have two issues here: the sale of your New Jersey house and changing residency while you still own a New Jersey home.

Let’s start with your change in residency.

We all know taxes in New Jersey are sky high, and people of all income levels are leaving the state.

“If you sell your New Jersey home and move to a no-tax state like Florida,no one can question your change of residence,” said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown. “But if you keep your New Jersey home while you change your residence, it could look like you are just trying to save on New Jersey income taxes.”

To make sure your change of residency sticks, you must do everything you would have done if you sold your New Jersey home, Kiely said. That includes getting a Florida driver’s licence, registering to vote in Florida and changing your mailing address for everything, he said.

“It hasn’t happened yet, but New Jersey could start to fight back if enough taxpayers start to abandon the Garden State, so be prepared, Kiely said.

Now let’s take a look at the eventual sale of your New Jersey home.

If a non-resident of New Jersey sells a house in New Jersey that is not and was not their principal residence for 24 months out of the previous 60-month period, that’s where the exit tax comes in, Kiely said.

The exit tax is not actually a separate tax. Instead, it’s an estimated income tax payment based on the sale of the home. The estimated tax is paid at closing.

The amount of the payment would be the greater of the taxable gain on the house times the highest New Jersey income tax rate, which is 9.97 percent, or two percent of the sales price of the home, Kiely said.

You would then file a New Jersey Non-Resident income tax return and you would receive a refund of some or all of the estimated income tax payment, he said.

“If the house you sold was used exclusively as your principal residence within the meaning of IRS Code Section 121, you would check box #2 on Form GIT/REP – 3,” Kiely said. “This section of the code covers the forgiveness of gain on the sale of your principal residence.”

Under this section, the first $250,000 of gain on the sale of your principal residence is forgiven, or $500,000 for a married couple.

“Since the house was your principal residence for the required period of time, you would not have to make an estimated tax payment,” he said.

Good luck with your decision.

Email your questions to Ask@NJMoneyHelp.com.

Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.