When you sell real estate in Maryland and are not a resident of the State of Maryland, you need to be aware of the non-resident withholding tax. Since 2003, the State of Maryland has mandated the withholding of income tax on the sale of all real property by non-resident individuals and non-resident entities. The settlement company is required to collect the tax at closing and remit payment along with the deed recording. As of 2019, the withholding tax is 7.5% for non-resident individuals and 8.25% for non-resident entities.
Frequently Asked Questions:
Are there any exemptions from this tax?
YES. Many sellers are unaware that they may acquire a Certificate of Full or Partial exemption from the withholding tax. This request must be made to the Comptroller of Maryland no later than twenty-one (21) days prior to closing. Thus, it is highly recommended that the non-resident seller applies as soon as the contract of sale is executed to ensure that the settlement company will receive the certificate in time for closing. In most situations, you can expect to get a partial exemption and will only pay the withholding tax on the true net gain of the property. In order to receive a Full exemption and pay no tax at the time of sale, you must meet the following conditions:
- You must certify under penalties of perjury that the seller is a resident of the State of Maryland
- You must certify under penalties of perjury that if you are no longer a resident of the State of Maryland, that the property sold is the seller’s primary residence as defined by the IRS code; i.e, your principal residence for two (2 ) of the last five (5) years and is currently recorded as such with the State Department of Assessments and Taxation.
- Property transfer is a result of foreclosure or a deed in lieu of foreclosure
- Property is transferred for zero consideration
- Property is transferred to the government
- A certificate has been issued by the Comptroller of Maryland stating no tax or a reduced amount is due on the sale (as discussed above)
How are the withholding taxes calculated?
The taxes collected are based on the net proceeds (total payment) from the settlement statement. As an example, let’s assume the Sales Price is $400,000 and you are paying off a $50,000 mortgage and your closing costs total $50,000. This would lead to net proceeds on the settlement statement of $300,000. The settlement company would be required to collect $22,500 in non-resident withholding tax for an individual ($300,000 gain @ 7.5%).
How is the tax withheld if there are both resident and non-resident sellers?
The net proceeds (total payment) will be divided into as many shares as there are sellers. Each seller’s residency will be separately determined, and the non-resident seller’s share will be subject to withholding.
Can I request a refund if I believe I overpaid the withholding tax?
Yes. The seller may file an Application for Tentative Refund of Withholding on Sales of Real Property by Non-residents with the Comptroller of Maryland within sixty (60) days or more after the tax was paid.