One of the biggest issues my firm encounters from the listing side of transactions is when sellers are unaware that they are subject to paying Maryland Non-Resident Withholding Tax. It comes up weekly, if not daily, and it can sour the experience for a seller when working with his or her agent. I have put together some common questions we frequently receive to provide some clarity on this subject. If you have specific questions, please give our team a call, and we can guide you through the analysis for your clients.
What is real estate-related withholding tax?
Maryland Non-Resident Withholding Tax is the payment of income tax to the State of Maryland on the net proceeds from the sale of real property, within the state, when the seller is not a Maryland resident.
When does this withholding tax need to be collected?
A seller is not required to have the tax collected if they are a resident of the State of Maryland. In the event they are no longer a resident here, they will need to have had the property being transferred as their primary residence for two of the last five years, and the property must still be listed as their principal residence with the State Department of Assessments and Taxation. If those criteria are not met, the seller would be required to pay the tax.
How is the withholding tax calculated?
The tax is calculated by taking the gross sale price and subtracting the sale-related expenses of the home (i.e. loan payoffs, pro-rations, commissions, etc.). After the net proceeds are calculated, they are multiplied by a percentage (8% for Individuals, 8.25% for Business Entities) resulting in the amount of tax owed.
Why does the tax have to be collected at settlement?
Unpaid tax will prevent the title company from being able to record the deed with Land Records. In order to have a deed recorded, at least one of these three items must accompany the deed to the courthouse: (1) an Affidavit of Residence which certifies the transferor meets the criteria for an exemption from the withholding requirements, or (2) a Certificate of Full or Partial Exemption, or (3) submission of payment of the tax along with Report of the Withholding Amount paid. Without employing one of those three options, the deed will not be recorded by the courthouse, and the title will not be transferred.
What can I do if I don’t think the full amount of tax is owed?
Any seller can apply for a full or partial exemption from paying the tax. The application which can be found on the Comptroller of Maryland’s website must be filled out and submitted to their office at least 21 days prior to the date of settlement. The form needs to be accompanied by supporting documentation for the state to make their determination of the actual amount of tax owed.
Can I apply to get back a part of the tax paid after settlement?
YES! The taxpayer can file a Maryland form MW506R (Application for Tentative Refund of Withholding on Sales of Real Property by Non-Residents) for any settlement that occurred between January 1 and October 1 of each calendar year. If the settlement occurs during the remaining period of any year, the property owner would need to file a Maryland State Tax Return as a means of receiving any overpayment of tax actually owed to the State of Maryland.
What is the most common mistake made relating to withholding tax?
The most common mistake is that sellers delay sending in their form to the Maryland Comptroller’s office 21 days or more ahead of the closing date of their property. There are instances where the Comptroller’s office can process the application faster, but they generally process them in the order in which they are received.
Sellers also frequently do not provide the supporting documentation along with their Application for Certificate of Full or Partial Exemption or their Application for A Tentative Refund. Without the appropriate supporting documentation (draft settlement statement, receipts for improvements, original settlement statement, etc.), the Comptroller’s office cannot process the application accurately. We also frequently see sellers who want to delay closing until their (usually delinquent) application for exemption has been processed, which can cause the seller to be in default under the terms of the Contract of Sale.
This article appeared in the November 2021 edition of Chesapeake Real Producers.