Settlement proceeds subject to income tax withholding?
* 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.
Maryland nonresident sellers beware: Your settlement proceeds are subject to income tax withholding. Surprisingly, many agents do not realize that their nonresident sellers may acquire a Certificate of Full or Partial Exemption from the tax, as discussed below. Indeed, we strongly advise agents to assist their nonresident sellers in applying for the Certificate of Exemption as soon as the contract of sale is executed; application for an exemption must be made to the Comptroller of Maryland no later than twenty-one (21) days before closing and with such a Certificate, the nonresident seller can walk away from settlement with all of his proceeds of sale.
In 2003, the Maryland Legislature passed an Act mandating the withholding of income tax on the sale of all real property by nonresident individuals and nonresident entities. Settlement officers are directed to ensure sufficient funds are withheld from the closing and are also required to pay the withheld tax to the recording office at the time the deed is submitted for recordation. The amount of tax currently* required to be withheld is 7.5 percent of the "total payment" to a nonresident individual and 8.25 percent to a nonresident entity. Indeed, the Clerk of the Land Records office will not accept an instrument for recording unless the withheld tax is paid or the instrument refers to one of the exemptions from the withholding requirement.
Withholding requirement exemptions are:
- A certification under penalties of perjury or an acknowledgment in the deed that the seller is a resident of the State of Maryland
- A certification under penalties of perjury or an acknowledgment in the deed that the property sold is the seller's primary residence as determined under the Internal Revenue Code
- The property is transferred pursuant to foreclosure or a deed in lieu of foreclosure
- The property is transferred to the government
- A statement in the deed indicating that the consideration paid for the property is zero; and
- A certificate issued by the Comptroller of Maryland stating that no tax or a reduced amount of tax is due on that particular sale or that the seller has provided adequate security to cover the tax liability.
With regard to exemption to number 6. (six), above, the Comptroller has noted several circumstances under which he will issue such a certificate. A sample of those circumstances are:
The tax due has already been paid;
- The transfer is made on an installment sales basis under Section 453 of the Internal Revenue Code;
- The seller is a tax exempt entity under Section 501(a) of the Internal Revenue Code;
- The transfer is to a partnership in exchange for a partnership interest so that no gain or loss is recognized under Section 721 of the Internal Revenue Code;
- The transfer is a like-kind exchange under Section 1031 of the Internal Revenue Code; or
- The transfer is between spouses or incident to a divorce in accordance with Section 1041 of the Internal Revenue Code.
Frequently asked questions
Is the amount of tax withheld calculated on the sales price or the net proceeds?
The "total payment" on which the Maryland income tax is withheld is equal to the total sales price for the property less (1) debts of the seller securing the property that are being satisfied at closing; and (2) expenses of the seller arising out of the sale of the property that are disclosed on the settlement statement. However, debts being satisfied at settlement that are secured within ninety (90) days of closing cannot be deducted from the "total payment" calculation.
How are taxes withheld where there are both resident and nonresident joint sellers?
The "total payment" will be divided into as many shares as there are sellers. Each seller's residency will then be separately determined and any share of a nonresident will be subject to withholding.
If income tax is withheld on the sale, does the nonresident seller still have to file a Maryland nonresident income tax return?
If a nonresident seller believes too much money was withheld, can he request a refund before filing the nonresident income tax return for that year?
The seller may file an Application for Tentative Refund of Withholding on Sales of Real Property by Nonresidents with the Comptroller sixty (60) days or more after the tax was paid.
Is tangible personal property sold with the property by a nonresident seller also subject to withholding?
About the author
Jennifer C. Concino is a partner of the firm Tobin, O'Connor, Ewing and practices in the areas of estate and trust planning and administration, probate, guardianships, non-profit entities, real estate and business law.