* Editor’s Note: As of 2016 the amount of tax required to be withheld is 7.5 percent of the “total payment” to a nonresident individual and 8.25 percent to a nonresident entity. For the most up-to-date information regarding Maryland withholding requirements, visit the Maryland comptroller website.
Sure, a seller would expect to pay various closing costs at the time of closing such as transfer taxes, real estate commissions, and settlement fees. But if you are a seller of a Maryland property, you may not be prepared for the possibility of an additional day of closing line item charge known as a non-resident withholding payment.
While the payment amount withheld is not the actual tax owed, Maryland law requires a non-resident seller of real property to remit an estimated payment to cover any possible tax implications incurred as a result of a gain on the sale. This means the settlement company will withhold 7.5% (or 8.25% if seller is a business entity) of a seller’s net proceeds (total payment) and remit the payment to the Comptroller of Maryland.
The following Q&A should help you determine whether a seller is subject to the requirements of the withholding payment:
Q: Is the seller exempt from the withholding payment?
A: If the seller can answer “YES” to one of the following questions then the seller will not be subject to the withholding payment:
- Are you, the transferor (seller), a resident of the State of Maryland?
- Although you, the transferor (seller), are no longer a resident of the State of Maryland, is this property your principal residence as defined in IRC 121 and recorded with the State Department of Assessments and Taxation?
Q: If the seller does not qualify for either of the exemptions, is it still possible to avoid or reduce the amount of the estimated withholding payment at the time of closing?
A: Yes. If the seller believes there is no capital gain on the sale or the capital gain is less than the amount required to be withheld (7.5% of total payment (net proceeds)), a nonresident transferor/seller can submit an Application for Certificate of Full or Partial Exemption (Form MW506AE) to the Comptroller requesting that the withholding amount be calculated based on the capital gain. However, the application must be received by the Comptroller no less than 21 days before the date of closing.
Q: If the seller is not exempt and is subject to the withholding, will the seller eventually receive a refund from Maryland for the withholding?
A: Maryland law requires a nonresident individual to file an end of the year income tax return for the year in which the sale occurred. The filing of this return will determine whether any gain has been realized on the property sale and the resulting tax liability (if any) will be paid from the withholding payment. Any balance remaining after deduction of the tax liability will be refunded from the withholding payment by the Comptroller of Maryland.
Q: What if, among multiple sellers (owners) of the same property, some are exempt while others are not?
A: The residence of the owners of the property will be determined separately. Withholding is required from each of the nonresident owners based on the total payment (net proceeds) that represents the ownership percentage of each of the nonresident individuals.
Q: If the seller is a non-resident personal representative of an estate, is the seller subject to the withholding requirements?
A: The personal representative is a fiduciary and acts on behalf of the estate. If the decedent was domiciled in the State of Maryland at the time of death, the personal representative (fiduciary) can declare as a resident of the State of Maryland and avoid the withholding requirements. The residence of the personal representative is not the determining factor.
Q: If the seller is a business entity, how is it determined whether the business entity is a resident or non-resident entity of the State of Maryland?
A: If the authorized representative for the entity can certify that the entity is qualified by or registered with Maryland Department of Assessments and Taxation to do business in Maryland, then the seller entity will be exempt from the withholding requirements.