If you are planning to sell a home in a high-cost state to fund a move to a more affordable region, you may have heard whispers in your community about the infamous "Exit Tax." It sounds like a parting penalty—a final, bureaucratic cash grab enforced by your current home state simply because you chose to pack up and leave.
Let’s clear up the myth: There is no actual "Exit Tax." What you are facing is a mandatory state income tax withholding at the closing table.
When an out-of-state resident sells a property, the state government loses its geographical leverage to collect any taxes owed on the capital gains of that sale. To protect themselves, states like New Jersey, New York, and California require the title company to withhold a set percentage of either the taxable gain or the total selling price at closing.
If your profit falls safely under the federal primary residence exclusion ($250,000 for single filers, $500,000 for married couples), you won’t actually owe tax on that money long-term—but the state may still withhold your cash at the closing table. You will then have to wait to get that money back as a refund when you file your final resident tax return the following spring. When executing a "Home Swap," you must account for this temporary lockup of your liquid capital so you aren't caught short on cash when purchasing your next property.